When a famous firm’s price-to-earnings ratio gets very low, do you just go ahead and buy the stock? That’s a question that value seekers will need to ask themselves if they’re considering United Airlines (NASDAQ:UAL) stock.
It might be “cheap for a reason,” as the old saying goes.
It’s not United Airlines’ fault that the U.S. airline industry is facing major problems. Still, these headwinds will affect United Airlines and its shareholders.
However, if risk-tolerant investors expect the company to overcome its issues, the market might eventually reward them for taking a chance on United Airlines.
Is UAL Stock Trading at an Irresistible Valuation?
Don’t get the wrong idea here. All stocks involve risks, and United Airlines isn’t going bankrupt anytime in the near future. Redburn analysts even gave UAL stock an upgrade from “neutral” to “buy,” along with an optimistic $80 price target.
The $80 price objective might be too ambitious, but there’s at least one reason to consider investing in United Airlines now.
Specifically, the shares may be undervalued. On a GAAP-measured, trailing 12-month basis United Airlines’ P/E ratio of 5.7x is much lower the sector median P/E ratio of 19.47x.
United Airlines has price-to-sales and price-to-book ratios that are also below the respective sector medians. If these valuation metrics are important to your investment approach and strategy, then feel free to consider UAL stock.
United Airlines’ Risks: It’s Not Just About Oil
Our main point today is that traditional valuation metrics aren’t the be-all and end-all of successful investing. You should also weigh a company’s major risks and obstacles.
United Airlines’ risks may be surmountable, but they’re definitely considerable. First and foremost, United Airlines and other U.S. carriers must deal with elevated fuel costs. As the petroleum price rises, this will surely impact United Airlines’ bottom line.
Then, there are other issues to bear in mind. United Airlines and other U.S. airlines are dealing with a shortage of pilots and air traffic control workers. Even beyond that, Third Bridge Global Sector Lead for Industrials Materials and Energy Peter McNally cited “capacity” as an industry-wide obstacle.
McNally explained what he meant by the “capacity” problem.
[M]ore planes are being put into service. Airlines have been aggressive in ordering,” he said. “These planes are being delivered. There’s more supply of seats, and that’s putting some downward pressure on fares here.”
Speaking of “supply of seats,” Reuters reported that United Airlines is facing a “consumer antitrust class action” lawsuit. This lawsuit accuses “major U.S. carriers of conspiring to drive up domestic airfares by reducing the number of available seats.”
UAL Stock Gives Investors a Lot to Think About
If you’re mulling a share position in United Airlines, you’ll definitely need to conduct your due diligence first. There’s a lot to consider, from United Airlines’ apparently attractive valuation to high fuel costs, worker shortages and more.
And so, United Airlines is a big company with big problems, but maybe those problems have already been priced into the shares.
Therefore, UAL stock gets a “B” grade and is only appropriate for risk-tolerant investors who expect United Airlines to overcome the aforementioned obstacles.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.