Is United Continental a Safe Investment?

With shares of United Continental (NYSE:UAL) trading around $40, is UAL an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

United Continental is a holding company and its principal wholly owned subsidiaries are United Air Lines and Continental Airlines. The company transports people and cargo through its mainline and regional operations; it also has contractual relationships with various regional carriers to provide regional jet and turboprop service branded as United Express. Companies and consumers worldwide look to travel at increasing rates since air travel is quicker and is becoming less expensive. As costs decrease and flights become more efficient, United Continental stands to see soaring profits as consumers and businesses look to travel more than ever.

United Continental intends to outsource about 600 positions in its systems at 12 airports across the U.S. The move will help the company to cut costs while improving earnings, which have plummeted in recent times when as rivals witness growth. The company employs about 87,000 workers. Although the company announced plans outsource more jobs, it also intends retake some previously outsourced positions. As such, the company will reclaim about 400 jobs at Denver, Honolulu, Dulles and Phoenix, according to a contract with workers union. The affected positions include baggage handlers, gate and ticket agents. The impacted airports are mostly served by United Express flights.

T = Technicals on the Stock Chart Are Mixed

United Continental stock has struggled to make significant progress over the past couple of months. However, the stock is currently surging higher and looks poised to continue. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, United Continental is trading between its rising key averages which signal neutral price action in the near-term.

UAL

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of United Continental options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

United Continental Options

48.91%

96%

94%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

August Options

Average

Average

September Options

Average

Average

As of today, there is an average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on United Continental’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for United Continental look like and more importantly, how did the markets like these numbers?

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

31.75%

119.75%

4,800.00%

35.96%

Revenue Growth (Y-O-Y)

-0.29%

7.21%

3.24%

0.62%

Earnings Reaction

-9.83%

-1.52%

1.13%

-1.91%

United Continental has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with United Continental’s recent earnings announcements.

P = Weak Relative Performance Versus Peers and Sector

How has United Continental stock done relative to its peers, Delta Air Lines (NYSE:DAL), Southwest Airlines (NYSE:LUV), JetBlue Airways (NASDAQ:JBLU), and sector?

United Continental

Delta Air Lines

Southwest Airlines

JetBlue Airways

Sector

Year-to-Date Return

4.92%

34.40%

44.53%

25.88%

28.43%

United Continental has been a poor relative performer, year-to-date.

Conclusion

United Continental provides access to quick and efficient air travel to consumers and companies across the nation. The company intends to outsource about 600 positions in its systems at 12 airports across the U.S. The stock has struggled to make significant progress over the past couple of months, but is currently surging higher. Over the last four quarters, earnings and revenue figures have been increasing, which has left investors pleased. Relative to its peers and sector, United Continental has been a poor year-to-date performer. WAIT AND SEE what United Continental does this quarter.

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

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