What Does United Continental’s Current Valuation Indicate?



Current valuation

As of June 24, 2016, United Continental (UAL) has a forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 3.23x. This is lower than all its major peers.

Below is how its peers are trading:

  • American Airlines (AAL): 4.4x
  • Delta Air Lines (DAL): 3.59x
  • Alaska Air Group (ALK): 3.54x
  • Southwest Airlines (LUV): 4.54x
  • JetBlue (JBLU): 3.5x
  • Spirit Airlines (SAVE): 6.9x
  • Allegiant Travel (ALGT): 5.9x

The Market is expecting UAL’s EBITDA to decline by 7% in the next year. EBITDA is expected to increase for its peers as follows:

  • American Airlines (AAL): 19%
  • Delta Air Lines (DAL): 18%
  • Alaska Air Group (ALK): 10%
  • Southwest Airlines (LUV): 11%
  • JetBlue (JBLU): 10%
  • Spirit Airlines (SAVE): 3%
  • Allegiant Travel (ALGT): 4%
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Our analysis

The above graph shows that UAL has mostly traded below the industry median. This could be due to its slow growth and the lowest margin compared to its peers. However, UAL’s already huge scale compared to its smaller peers will make it difficult to achieve high growth. Also, since UAL has gained maximum benefit from both fuel prices and hedging in 2015, there will be limited margin expansion in 2016.

Investors should watch UAL’s expected future EBITDA growth, its high leverage, and its future margins. This is especially important since analysts are now expecting that airline margins have peaked.

Investors should also keep an eye on the industry situation since industry fundamentals also impact the company’s valuation multiple. Expected growth in travel demand for 2016 will help boost revenues.

Since fuel is a major expense for the airline industry, rising fuel costs will have an immediate impact on profitability if airlines can’t pass these costs on to their customers. This would adversely affect valuations.

UAL forms 2.2% of the PowerShares Dynamic Market ETF (PWC).


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