We recently upgraded our long-term recommendation on United Continental Holdings Inc. (UAL) from Underperform to Neutral based on future growth prospects. The largest U.S. airline retains the Zacks # 3 (Hold) Rank for the short term (1-3 months).
We believe United has resolved to a certain extent the reservation glitches that had taken a toll on the demand for its services in the first quarter, ensuing in higher costs and revenue loss. Reservation glitches occurred in March due to the adoption of a single loyalty program, Mileage Plus, and the transition of the Continental website into the new United website.
The adoption of a single loyalty program has created a new growth opportunity for the company’s loyalty business. We believe this segment will be the highest margin-producing business in the long term as United capitalizes on all the benefits of strengthening and expanding networks, widening new memberships and launch of new products like MileagePlus Headliners and the Gift Card Exchange.
Though the company’s future growth prospects remain bright based on improving air travel demand, expanding product and services, fleet and network optimization, hedging strategy and the expected merger benefits from Continental Airlines, we believe 2012 will be a critical year owing to the successful integration of Continental Airlines, surging fuel prices, uncertain economic conditions and the threats of recession in Europe.
Additionally, United sees some inflationary pressure in salaries and wages of employees, which will increase the operating cost of the company in the near future. Further, ancillary business (product introductions and improvements) expenses as well as fleet rightsizing initiatives are expected to weigh on the near-term results.
On the liquidity front, United Continental, which gives strong competition to Delta Air Lines Inc. (DAL) and Southwest Airlines Co. (LUV), continues to have a healthy balance sheet. The company had $7.3 billion in cash and short-term investments, and $500 million in undrawn revolving credit facilities as of March 2012.
Moreover, the Zacks Consensus Estimate projects earnings per share of $3.99 for fiscal 2012, representing a substantial growth of 14.40% annually. The Zacks Consensus Estimate moved up by 20 cents in the last one month, suggesting positive analyst sentiments on the stock.
