Is United Continental Poised to Head Higher?

With shares of United Continental (NYSE:UAL) trading around $44, 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, the parent company of United Airlines, plans to lower the number of daily departures from its unprofitable Cleveland hub starting in April because of insufficient demand, according to a memo to employees. Average daily departures will fall by around 60 percent, leading to 36 percent less capacity based on seats, Chief Executive Jeff Smisek said in the memo. ”Our hub in Cleveland hasn’t been profitable for over a decade, and has generated tens of millions of dollars of annual losses in recent years,” Smisek said. The reduction could result in up to 430 airport operations staff and 40 catering personnel losing their jobs, Smisek said.

T = Technicals on the Stock Chart Are Strong

United Continental stock has seen rising prices over the last couple of quarters. However, the stock is currently trading sideways and may need time to consolidate. 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 above its rising key averages which signal neutral to bullish 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

46.44%

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

March Options

Flat

Average

April Options

Flat

Average

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

2013 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

119.75%

4,800.00%

35.96%

27.94%

Revenue Growth (Y-O-Y)

7.21%

3.24%

0.62%

1.38%

Earnings Reaction

-1.52%

1.13%

-1.91%

-1.59%

United Continental has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have had conflicting feelings about United Continental’s recent earnings announcements.

P = Excellent 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 (NYSE:JBLU), and sector?

United Continental

Delta Air Lines

Southwest Airlines

JetBlue Airways

Sector

Year-to-Date Return

17.34%

8.45%

8.86%

0.53%

9.79%

United Continental has been a relative performance leader, year-to-date.

Conclusion

United Continental provides access to quick and efficient air travel to consumers and companies across the nation. The company plans to lower the number of daily departures from its unprofitable Cleveland hub starting in April because of insufficient demand. The stock has seen rising prices over the last couple of quarters, but is currently trading sideways. Over the last four quarters, earnings and revenue figures have been increasing. However, investors have had conflicting feelings about recent earnings announcements. Relative to its peers and sector, United Continental has been a relative year-to-date performance leader. Look for United Continental to OUTPERFORM.

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