United Airlines (NASDAQ:UAL) and its airline peers have been among the most popular economic recovery plays. We have seen several airline stocks take off over the past year in hopes of a normal, or at least better travel environment ahead.
Investors that were fortunate enough to buy into one of United Airlines' two dips below $20 in March 2020 and May 2020, respectively have made some nice gains. But those that missed the opportunity to buy the stock for peanuts may be wondering if its too late to book a position.
Heading into the first report of the new year, United Airlines had a captive audience of investors wondering if the stock began its initial ascent too early.
How Was United Airlines 2021 Q1 Financial Performance?
The market was braced for another steep loss when United Airlines reported its first quarter results and that it got. Unfortunately, the $7.50 per share net loss was well below the consensus expectation of a $7.02 per share loss. Granted, it's a difficult environment to gauge travel demand, revenue, and costs, but the numbers were ugly any way you cut it.
Revenue was down 66% to $3.2 billion and also fell short of the Street's forecast. It was also at the lower end of management's 65% to 70% guidance. The revenue decline was particularly discouraging because it showed no improvement from 2020's 65% revenue drop.
There was one silver lining in the first-quarter report that being a return to cash flow positive territory in March 2021. This reflects a surge in bookings as people continue to scoop up seats in anticipation of smother skies ahead. Daily cash burn fell to $9 million in the first quarter compared to $19 million in the fourth quarter.
Is the Market Too Far Ahead of the Airlines Industry Rebound?
United Airlines management made it clear that travel demand is coming back online in a big way. It noted that demand for leisure travel is above pre-pandemic levels in some markets. But while there's no doubt that the restrictions of COVID-19 have created a giant global ball of pent-up travel demand, how soon this translates to sales and profits remains to be seen.
The market has certainly lined up well before United Airlines and other airlines' financial performance has taken off. However, as we learned this week, boarding the plane before the travelers board exposes the investor to some sobering quarterly results and stock price volatility.
A lot of weight also seems to be placed on the company's ability to execute its turnaround plan. This includes moves likes limiting plane capacity to adhere to government regulations and appeal to consumers' sensitivity to elbow room these days. It also includes plans to reduce costs by $2 billion and return the company to its pre-pandemic operating margins. This will be an especially challenging goal in the face of rising fuel prices. Overall, these initiatives make intuitive sense but plenty of execution remains.
While the market is forward-thinking, it can also be impatient. Traders have effectively given United Airlines advance credit for their transformation plan with the assumption that seats will soon be filled with eager leisure and business travelers. But the longer these expectations don't come to fruition, investors may get antsy and move their money elsewhere. This could be how 2021 plays out for United Airlines stock.
Is the United Airlines Pullback a Buy Opportunity?
In reaction to the first-quarter report, United Airlines shares are in sell-off mode and back near $50. Is this simply an overdue correction for a stock that had tripled off its March 2020 bottom or could it be a sign of more turbulence ahead?
The technical analysis is mixed with no overwhelming signal in either direction. The relative strength indicator has dipped below 20 and the April 20th candlestick has fallen well outside the lower Bollinger band range suggesting oversold conditions. On the other hand, the above-average red trading volume and lack of support from the 50-day moving average are ominous signs.
The 10,000-foot view from sell-side analysts is also all over the map. Thus far, only one firm has chimed in since the first quarter report that being Raymond James which reiterated its 'buy' rating. There is a mixed bag of rating and price targets that range from $32 to $74. It'll be interesting to see if these targets get trimmed in the aftermath of this week's deflating report.
So, without any overly exciting signal from the technical or fundamental analysis, investors are better off on the sidelines when it comes to United Airlines stock. Once there is confirmation of loosened travel restrictions and healthy financials, this would be a better time to climb aboard even if the stock has moved higher. Until then, sit back and enjoy the bumpy ride that is the airline space.
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