Holdings is scheduled to report third-quarter results after the market closes on Wednesday. If
Delta Air Lines
’ results are an omen, United may have a tough time meeting Wall Street estimates.
Delta (ticker: DAL) missed forecasts for revenue and earnings in the quarter, racking up a $2.6 billion pretax loss, as Barron’s noted Tuesday. Analysts came to the airline’s defense, praising the carrier’s moves to cut costs, shore up liquidity, and lower its cash-burn rate, but the airline is still struggling to fill planes with business and international travel staying severely depressed, while leisure travel fills in the gaps.
Airline stocks were up slightly Wednesday, with the
NYSE Arca Airline Index
ahead by 1.2% in morning trading. Shares of Delta closed down 2.7% Tuesday after reporting earnings, and were ahead 0.4% Wednesday.
United (UAL) isn’t expected to fare much better with its earnings report. Analysts forecast third-quarter passenger revenue falling 83% from a year ago, pulling overall sales down 78% to $2.5 billion. The airline is expected to post a pretax loss of $2.7 billion and an adjusted loss of $7.53 per share, according to consensus estimates.
Delta’s results did not deter Wall Street from recommending the stock. Bernstein’s David Vernon adjusted his estimates slightly, but maintained an Outperform rating and $41 price target.
The airline is managing through “a staggering demand shock at a better than expected rate,” he writes. He expects travel demand to continue improving into the winter and expects more international destinations to open up with advances in coronavirus treatments and a vaccine.
“That recovery should be significant enough to bring networks into balance and allow Delta to meet its objective of cash flow break-even…in early 2021,” he writes.
Seaport Global Securities analyst Daniel McKenzie also kept a Buy on the stock. Delta’s costs “are coming in better than expected and lower the bar on revenue and cash burn this winter,” he writes. “Hence our increased confidence that plenty of value exists for those that can stomach near-term Covid-19 volatility.” While he maintained a $43 price target, he writes that stock could fetch $50 to $55 on earnings of $5 a share in 2022.
United may be a tougher case. Like Delta, United relies heavily on business and international fares. But United’s finances aren’t as strong; the carrier recently tapped more available government loans under the Cares Act to shore up liquidity (while Delta held off). Raymond James analyst Savanthi Syth estimates that United has 21 months of cash on hand, assuming no recovery in demand from current levels, compared with 25 months for Delta.
The key to United’s stock is likely to be updates on its cost cutting and cash burn. The airline is now laying off around 13,400 workers through involuntary furloughs, and analysts will want to see signs that United is making more progress on its cost structure in the absence of a recovery in revenue.
Despite the tough operating environment, J.P. Morgan’s Jamie Baker recently upgraded the stock to an Outperform with a $52, implying gains of 44% from recent prices around $36. The airline’s liquidity should be enough to endure the downturn, he writes, and the stock merits a multiple of nine times earnings, based on 2022 estimates of $6.06 a share.
Write to Daren Fonda at [email protected]