United Airlines(NASDAQ: UAL) stock has increased by 148% over the last year, but that doesn't mean it isn't still a great value opportunity. On the contrary, the stock still looks excellent, and many trends continue to favor it.
Here are five reasons why United Airlines could be an excellent stock for your portfolio.
1. End markets are well positioned
The airline entered 2025 in great shape. The corporate traveler is coming back (business revenue increased 16% year over year in the fourth quarter of 2024), with notable improvement in the transatlantic market, where United holds a strong position, and the premium traveler market (premium passenger revenue was up 10% on the same basis) remains strong.
All this is good news for profit margin, and United's adjusted operating profit margin was 10.7% in the fourth quarter of 2024, compared to 7.7% in the same period of 2023.
Of particular note is that the international market will likely remain strong for a while, given Boeing's and Airbus' challenges in delivering new wide-body planes to airlines.
2. Key metrics are turning the corner
The ongoing improvement in end market demand and United's pricing power is evident in its most important metric: revenue per available seat mile (RASM). It's a key number because it indicates how effectively an airline's pricing strategy is and how effectively it utilizes its capacity.
The good news is that United's total RASM growth turned positive in the fourth quarter of 2024, with a 1.6% increase, and chief commercial officer Andrew Nocella said on the recent earnings call: "We project domestic RASM will turn solidly positive in Q1."
The domestic pricing environment is improving as underperforming airlines remove unprofitable capacity at an increasing rate, and business traffic growth accelerates. Industry fare sales are less prevalent with lower discount rates, as airlines are prioritizing profitability.
The RASM improvements and commentary confirm an improving operating environment.
Image source: Getty Images.
3. Airlines are behaving rationally
Nocella's point about airlines removing unnecessary capacity highlights an interesting development that could make airlines more investable over the long term.
The industry's boom-and-bust cycles stem from airlines' tendency to expand capacity rapidly during booms but hesitate to reduce it during slowdowns. The result tends to be a slump in pricing and profitability, as the airlines tend to have relatively high fixed costs.
The North American airline industry, specifically, faced conditions of overcapacity in the summer (one reason why airline stocks sold off going into summer). Still, it appears that a combination of more disciplined behavior and pressures in the low-cost carrier market resulted in the capacity reduction that's aiding RASM growth now.
If this newfound discipline proves lasting, United Airlines and other leading airline stocks may be due to a valuation expansion as investors pencil in improved longer-term profitability.
Image source: Getty Images.
4. More diverse revenue streams
In addition to more disciplined behavior, the airline industry is distinct from its previous incarnation, because airlines like United and Delta are diversifying their income streams and customer relationships. Both airlines are no longer transportation companies offering one-off transactions with customers; they now have highly successful loyalty programs that encourage repeat bookings. Lucrative co-branded credit cards bring in substantive remuneration for airlines when card owners use them.
The diversity of the revenue streams helps protect against the downside when demand starts to slow. Again, this implies a valuation expansion opportunity.
5. Valuation remains compelling
Speaking of valuation, the chart shows a stock trading at a low valuation despite its significant price rise over the last year.
One reason for this could be market pricing in the airline industry, which is typically cyclical. Still, as outlined, there are strong arguments why United Airlines isn't as cyclical as it used to be.
Another reason for the low valuation could be the significant amounts of debt taken on due to the lockdown measures imposed during the COVID-19 pandemic. However, United does have a substantial level of debt of $28.7 billion, but it also has $8.8 billion in cash and equivalents and generated more than $3 billion in free cash flow, with management expecting $3.4 billion in 2025. Its debt metrics are improving significantly.
A stock to buy
All told, United Airlines is a highly attractive stock, and as long as the travel market remains buoyant, it's likely to do well based on the current price as a starting point.
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