United Continental (UAL) is currently trading at a forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 5.9x, which is lower than its average EV to EBITDA multiple of 6.8x seen since the start of 2009.
American Airlines (AAL) and Alaska Air Group (ALK) are trading at a similar valuation of 6.6x, followed by Southwest Airlines (LUV) at 6.3x and Spirit Airlines (SAVE) at 6.0x. United Continental (UAL) is trading at 5.9x and JetBlue Airways (JBLU) is trading at 5.6x.
The market is expecting DAL to record an EBITDA per share growth of -2.9% in the next year. AAL’s EBITDA is expected to fall 0.1%, UAL’s is expected to fall 4%, ALK’s EBITDA is expected to grow 13%, LUV’s -1.5%, JBLU’s -2.7%, SAVE’s 11.5% and ALGT’s 0.7%.
The above chart shows that UAL has mostly traded below the industry median.
For the short term, United Continental’s unit revenue trend will tend to drive its valuation multiple. If United is, in fact, able to achieve unit revenue improvement 2Q17 onwards, the stock will see a re-rating.
For the long term, United’s success in implementing its margin expansion plan through 2018 will be important. Investors should also keep an eye on the industry situation, as industry fundamentals also impact the company’s valuation multiple. Expected growth in travel demand for 2017 should help boost revenues.
Also, 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 on these costs to their customers, which would hurt valuations.
United Continental is 1.3% of the First Trust Industrials/Producer Durables AlphaDex Fund (FXR).