United Continental (UAL): Watch the Airlines in the n-t

I think traders should keep the Airline names on their radar this morning after United Continental (NYSE:UAL) reported weaker-than-expected RASM #’s last night.

here’s the link to the PR

Here are some comments from tier-1 firms this morning:

UBS: United’s implied June revenue guidance was below expectations and when combined with other guidance suggests Q2 consensus EPS numbers are about $0.30 too high. Tomorrow will likely be a bad day for the airline stocks after a good, oil-driven day today. Given United’s June revenue, Delta’s double digit RASM growth guidance for Q2 looks very challenging.

Our 12-month PT falls to $36 from $39 based on ~6x EV/EBITDAR. Our 2011 EPS est. drops to $4.00 from $4.42. Maintains Buy.

Morgan Stanley: UAL guided to 2Q11 PRASM growth of ~8.8%, below sell-side ests. for 10%-11%. Though it was clear June PRASM growth would be lower than UAL’s ~14.5% May result, guid. implies June growth of 4%-5%, below our est. of a high-single digit result. Despite ~6pts of one-time adjustments in June, we believe UAL’s outlook will negatively impact investor sentiment as it will fuel demand risk concerns. That said, given low valuations, the recent selloff, and the demand skepticism we have heard from investors of late, we believe investors’ ests. were below the sell-side, which should dampen the neg. reaction. Furthermore, the possibility of stronger results from UAL’s legacy peers remains a potential positive catalyst.

(It’s also worth noting MSCO is closing their positive Research Tactical Ideas on LCC & DAL, due to UAL news)

Barclays: June RASM from UAL was a disappointment. We underestimated revenue reconciliation payments UAL would have to make to alliance partners at quarter’s end, but we still find performance a bit disappointing. Our forward estimates reflect revenue deceleration on declining fuel and a recent softer economic climate. We now believe that deceleration developed earlier than expected, though recent feedback from DAL suggests less deceleration. We expect UAL and the group to be soft on the heels of this announcement, but at earnings multiples in the low single digits we would be buyers of material weakness, especially in UAL and DAL

Deutsche: We are lowering our June Q diluted EPS estimate for UAL from $1.75 to $1.50 (vs. consensus of $1.60) – a reversal of a change we made three weeks ago – as PRASM for the month of June came in lighter-than-expected (e.g. mid-single digit PRASM gain). We were expecting a 12% gain in PRASM for the month of June; based on quarterly guidance issued by the company last night, we estimate the gain to be closer to 5%. Also, we are lowering our full year 2011 EPS estimate from $3.35 to $3.10 (vs. consensus of $3.83).

Overall, no change to our longer-term investment case for Buy-rated UAL. Furthermore, the stock is fairly inexpensive on our more conservative forecast as its enterprise value is currently trading at 5.0x and 4.8x our 2011 and 2012 EBITDAR forecasts, respectively. As such, should the stock be under pressure this morning, we would see it as an opportunity for investors to add to their position.

Notablecalls: While not a disaster, UAL’s #’s tell a story of possible deceleration in the sector. It looks like the group has been reluctant to move higher even in face of significantly declining oil price. Now that we have bad news, it appears the group is vulnerable to the downside. Analyst consensus clearly stands too high.

While total gambling on my part, it LOOKS LIKE oil is getting ready for a bounce today. That should add some fuel to the fire.

I haven’t received anything from J.P Morgan’s Airline God Mr. Baker this morning, so he must still be positive on the group.

I’m thinking UAL will be down 5%+ today. Maybe there’s a trade there.

PS: I’m posting this on market open.

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