The COVID-19 pandemic has impacted nearly every industry and upended daily life for hundreds of millions of people are the world.

There might not be a harder hit industry than that of travel and leisure. Air travel has dried up in the weeks and months following the outbreak, with the second quarter being especially difficult for the airlines. Many countries have enacted travel bans for visitors from the U.S., which has greatly reduced international travel.

One company facing the brunt of the coronavirus is United Airlines Holdings, Inc (UAL). The shares of the company are down nearly 63% year-to-date. At the same time, hopes for a quick recovery could make the stock appealing at such a low price. United Airlines is a sizeable position for many institutional investors such as the hedge fund Knighthead Capital Management,

While United could be a successful turnaround, the stock will likely continue exhibit volatility, as the risks surrounding the company remain. As a result, risk-averse investors should avoid the stock.

Company Background & Recent Earnings Results

United Airlines is made up of United Airlines and Continental Airlines. Under more normal circumstances, the company has more than 4,500 daily flights both domestically and international. The nearly 100-year-old company is one of the largest publicly owned airlines in the world. 

United Airlines reported second-quarter earnings results on 7/21/2020. As expected, results were severely impacted by COVID-19. Revenue fell 87% to $1.5 billion, though this was nearly $80 million higher than analysts had predicted. The company lost $9.31 per share for the quarter compared to earning $4.21 per share in Q2 2019. As bad as this loss was, it was only $0.06 lower than expected.

The company’s cash burn averaged $40 million per day in the second quarter, but that is expected to decline to $25 million per day by the end of the third quarter.

United Airlines has taken steps to help it endure this difficult environment. The company raised more than $16 billion since the start of the crisis through stock issuances, debt offerings and the CARES Act Payroll Support Program. United Airlines has also offered voluntary separation packages to employees in order to reduce costs and more than 6,000 have agreed to the offer.

The company has also increased its international cargo capacity, which resulted in a 36.3% gain in cargo revenue in the quarter.

United Airlines has liquidity of approximately $15.2 billion as of 7/20/2020 with an expectation for liquidity of more than $18 billion by the end of 2020. This should allow the airline to continue to operate its business in the event that air travel remains extremely low.

Projected Returns

United Airlines does not offer a dividend payment to help offset the decline in share price. Therefore, total returns will consist entirely of earnings growth and multiple expansion.

United Airlines is expected to lose $22.86 per share in 2020. Sure Dividend believes that the company would have earnings power of ~$6.00 under normal conditions. The company compounded earnings by almost 11% from 2010 through 2019. We believe a 5% growth rate through 2025 allows for some margin of safety given the uncertain circumstances the airline, and the sector, face in the short term.

We have a 2025 price-to-earnings ratio target of 7 for the stock, which is slightly below its decade-long average multiple. Using the recent closing price of $32.88 and our earnings power estimate, United Airlines trades with a forward price-to-earnings ratio of 5.5. Expanding to reach our target multiple could add 4.9% to annual returns over the next five years.

Total returns would consist of the following:

• 5% earnings growth
• 4.9% multiple expansion

Added up, shareholders of United Airlines could see annual returns of 9.9% over the next five years. However, a great deal of risk remains for the company, pertaining to the coronavirus pandemic.

Final Thoughts

COVID-19 has caused havoc throughout the airline industry and United Airlines is no different. The company’s second-quarter results were expected to be very poor and the third quarter is not shaping up to be much better. The company does appear to have enough liquidity to cover expenses and should have its cash burn down significantly in the third quarter.

That said, our best-case scenario for the stock is a total return of less than 10% per year through 2025. This is a satisfactory return under normal levels of risk, but the risks of the ongoing pandemic to United Airlines’ business remain elevated. Only investors not afraid to take risks should consider buying United stock.