AAL vs. UAL: Which Airline Stock is the Better Buy?

TipRanks

Tue, Jan 9, 2024, 5:39 PM 5 min read

Both companies are among the largest U.S.-based airlines, each with a nearly 100-year history. Shares of American Airlines are down 4% over the last year after rallying 19% over the last three months. United Airlines stock is off 6% over the last year, although it has bounced only 7% over the last three months.

With such a significant difference in their three-month rallies, it should come as no surprise that AAL is trading at a higher valuation than UAL. We’ll compare their price-to-earnings (P/E) ratios to gauge their valuations against each other and against that of their industry.

For comparison, the U.S. airline industry is trading at a P/E of 14. Over the last three years, the industry lost money due to the COVID-19 pandemic, so there is no three-year average P/E to consider.

American Airlines (NASDAQ:AAL)

At a P/E of 6.0, American Airlines is trading at a steep discount to its industry but slightly higher than United. Unfortunately, American Airlines swung to a loss during the third quarter, suggesting a bearish view might be appropriate despite the discounted price.

During the third quarter, American Airlines reported losses of $545 million as its revenue remained flat year-over-year while its expenses rose. The company also slashed its full-year adjusted earnings guidance to a new range of $2.25 to $2.50 per share versus its previous projection of between $3 and $3.75 per share.

While American Airlines swung to a net loss in the third quarter, United Airlines and Delta Air Lines (NYSE:DAL) both reported increasing revenues and profits of about $1.1 billion for the quarter. American Airlines’ management blamed the third-quarter loss on higher fuel prices and the new contract with its pilots, which added more than $9 billion in additional benefits and compensation.

Given that United and Delta both generated solid third-quarter results despite those industry-wide challenges, it’s clear that American Airlines’ financial position is not as strong. The fourth-quarter earnings report due later this month should provide an important update on the airline’s financial condition.

However, its long-term stock-price losses and recent loss suggest this might not be a stock worth holding in the near term in anticipation of an eventual recovery.

What is the Price Target for AAL Stock?

American Airlines has a Hold consensus rating based on three Buys, seven Holds, and one Sell rating assigned over the last three months. At $14.68, the average American Airlines stock price target implies upside potential of 2.1%.

United Airlines (NASDAQ:UAL)

At a P/E of 5.0, United Airlines is trading at a steep discount to its industry and at a discount to AAL. However, United is clearly in a better financial position than American Airlines, and its stock price has held up much better over the long term. Thus, a bullish view seems appropriate, albeit with a warning about the risks of owning these shares.

For the third quarter, United reported a 12.5% year-over-year increase in revenue to $14.5 billion, with $1.1 billion in net profits, indicating continued strength. However, it did cut its guidance and issue warnings about rising fuel prices and the suspension of flights to Israel amid the war there. As such, Wall Street now seems to have priced in those concerns, as the consensus for adjusted earnings in the fourth quarter now stands at $1.70 per share.

What’s particularly interesting about United Airlines is its long-term stock-price action. The entire travel industry sold off hard in the early days of the pandemic as the whole world shut down and borders were closed. As a result, UAL and AAL both saw their stock prices plummet in early 2020, sending ripple effects throughout their past stock-price action.

However, United shares are roughly flat over the last three years and off 47% over the last five years, indicating that they haven’t recovered since the early 2020 sell-off. Additionally, the stock is down only 4% over the last decade.

Thus, since United Airlines has held up better than American Airlines, both recently in terms of profits and over the long term, this could be a good time to buy a few shares. However, the fourth-quarter earnings release could change this view, depending on what it shows.

What is the Price Target for UAL Stock?

United Airlines has a Moderate Buy consensus rating based on 11 Buys, five Holds, and one Sell rating assigned over the last three months. At $60.67, the average United Airlines stock price target implies upside potential of 39.3%.

Conclusion: Bearish on AAL, Bullish on UAL

The last few years have not been easy for airlines, but United is clearly in a much better position than American Airlines based on recent profits. Additionally, UAL’s stock price has held up far better than AAL’s over the last 10 years, with United off only 4% and American down 46%.

As a result, this could be a good time to buy the dip in United Airlines in hopes of a full recovery from the pandemic, although investors may want to keep the position small for now due to the high risk associated with the stock. There’s no guarantee that the tough times are over, but the risk-reward profile looks attractive now.

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