Buckingham: United Continental Still Has 73% Upside

Courtesy of Benzinga.

After United Continental reached a new agreement with its pilots granting them a wage increase of roughly 13 percent (some sources have said 16 percent) effective January 1, 2016, analysts at Buckingham research looked into the company and decided to leave their 2016 pre-tax outlook unaffected.

However, they estimate the deal will generate an incremental cost headwind of ~$200 million–$270 million.

All Things The Same…

Ceteris paribus, the deal should impact the firm’s 2016 EPS estimate by 4 to 6 percent, or by $0.35–$0.45 per share, leaving United wages (ex profit-sharing) at American Airlines Group Inc (NASDAQ: AAL) levels – to which profit sharing is then added.

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“Net net, the pilots get a very generous mid-contract raise; mgmt. buys labor peace and possibly better operations (and on this point, we don't expect mgmt. to quantify the cost of a bad operation, but in the past we've quantified $1 billion in revenue book-away),” the report expounded.

At this point, however, the analysts are not considering other labor deals with flight attendants or other groups in the company, although they could eventually affect their non-fuel CASM projection next year.

Moreover, the experts noted that the decision to “pull pilot expense forward to 2016 (from 2017) is in the context of a weaker revenue backdrop following a terrorist event in Paris and CIA warnings that more are likely.”

Having said this, United’s fourth-quarter PRASM outlook struck Buckingham’s analysts as quite conservative, although they now expect the carrier to fall short of the higher end of the guide range.

The Sector

United remains the cheapest stock in the industry, the analysts noted. Furthermore, it offers “a better margin story than investors appreciate given fleet restructuring that is driving greater efficiency across the carrier's network.”

So, with shares down 24 percent from their 52-week high and trading at 7.0x the firm’s 2016 EPS estimate, an attractive entry point seems open. “The recently announced $3 billion share buyback is equivalent to 14 percent of the carrier’s market cap today, with most of the $3 billion remaining,” they concluded.

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.

Image Credit: Public Domain

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