United Continental (UAL) is currently trading at a forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 5.8x, which is lower than its average EV-to-EBITDA multiple of 6.7x since the start of 2009.
Delta Air Lines (DAL) is trading at the lowest valuation among peers of 5.3x. It’s followed by United Continental (UAL) and JetBlue Airways (JBLU), both of which are trading at 5.8x. Spirit Airlines (SAVE) is trading at a valuation of 6.3x. American Airlines (AAL) and Alaska Air Group (ALK) are trading at the same valuation of 6.6x. Southwest Airlines (LUV) is trading at the highest valuation among peers of 6.7x.
The market is expecting DAL to record an EBITDA per share growth of 2.0% in 2017. AAL’s EBITDA could fall 0.1%, UAL’s ratio is expected to fall 4%, JBLU’s is expected to fall 2.7%, and LUV’s is expected to fall 1.5%. ALK’s EBITDA is expected to rise 13%, SAVE’s is expected to rise 11.5%, and ALGT’s is expected to rise 0.7%.
In the short term, United Continental seems to have the ability to grow its unit revenue despite its aggressive capacity growth. This is also verified by the fact that United Continental’s stock rose 13.5% in May after it confirmed that its unit revenue grew by more than it expected in April.
In the long term, United’s success amid the industry situation will be a key driver of the company’s valuation multiple. Expected growth in travel demand for 2017 and the country’s economic growth will be important in the company’s future growth. The sudden rise in fuel costs is also a key risk to the company’s valuation.
Investors can gain exposure to United Continental by investing in the PowerShares Dynamic Large Cap Value Portfolio (PWV), which invests 2.3% of its portfolio in UAL.