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United Airlines Stock: Why Is Citigroup Bullish?

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On November 1, Citigroup (C) analyst Stephen Trent initiated coverage on United Airlines (UAL) stock with a bullish recommendation. His target price of $107 on United Airlines stock reflects an upside potential of 17% over the next year. According to the CNBC report, Trent is more impressed with United Airlines’ global partnership strategies.

Notably, United Airlines is expanding its operations across different continents by partnering with Copa, Avianca, and Azul. Partnerships and alliances help airlines expand their geographical presence and networks with fewer investments. Therefore, the approach helps them boost their profits and minimize risks.

With this strategy, the company has been able to add 26 new international routes to its network over the last two years. The company has been able to expand its operations across all seven continents.

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Analysts are bullish on United Airlines stock

So far, United Airlines stock has struggled to keep pace with the broader market this year. United Airlines stock has returned 9.5% YTD (year-to-date), while the Dow Jones and the S&P 500 indexes have risen 17.2% and 22.3%, respectively. The stock’s YTD gain is also lower than the iShares Transportation Average ETF’s (IYT) return. IYT, which has allocated about 20% of its funds in the passenger airline industry, has gained 16.8% YTD.

The stock’s underperformance is mainly due to investors’ concerns about its growth prospects. Investors are concerned about ongoing troubles with Boeing’s (BA) 737 MAX aircraft. Notably, the MAX has faced a global flying ban since mid-March following two deadly accidents within five months. United Airlines, which owns 14 MAX jets, has faced thousands of flight cancelations and seating capacity loss every month.

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Despite the underperformance, the stock has been one of several analysts’ favorite picks. More analysts have turned bullish on the airline since the beginning of the year. About 53% of the analysts had a “buy” equivalent rating on the stock at the beginning of the year. The proportion has increased to 71% as of today. Analysts’ average target price has also increased 4% to $109.94.

What’s ahead for the stock?

We think that the MAX problems are overblown for United Airlines stock. Despite massive flight cancelations, the company has improved its seating capacity and financial results.

United’s overall seat capacity grew 1.9% in the third quarter—in contrast to other players facing similar MAX issues. Southwest Airlines (LUV), which has 34 MAX planes, recorded a 2.9% YoY decline in its third-quarter seating capacity. American Airlines (AAL) reported a 1% YoY improvement in its seat capacity in the third quarter. Notably, American Airlines has 24 MAX aircraft.

United Airlines’ pre-tax margins are increasing at a much higher pace than its peers. In the third quarter, the airline’s pre-tax margin improved by 250 basis points YoY to 12.1%. Southwest and American saw a YoY improvement of 50 basis points and 80 basis points in their respective third-quarter pre-tax margin. Their third-quarter pre-tax incomes were impacted negatively by $210 million and $140 million, respectively.

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