United Airlines (NASDAQ:UAL) may not seem to be in the dire circumstances it faced four months ago. At least that is what its stock price says. UAL dropped below $20 in mid-May, and has since been on a slow path toward recovery. At this point UAL stock has eked out a 93% improvement since those dark days. But to put that in some perspective, it’s still down 62% on the year.
The airline is still burning through cash and still facing a dramatic decrease in passenger volume.
Given the situation — which includes a second-quarter net loss of $1.63 billion — it’s probably no surprise that UAL earns an F in my Portfolio Grader. But is there a case to be made for buying UAL stock? After all, it’s the cheapest it has been in years, and just prior to the pandemic, it was trading at all-time highs.
A Pandemic Disaster for UAL Stock
The novel coronavirus pandemic has been a disaster for the airline industry. There’s no other way to describe it. Passenger volume has plummeted. Planes are parked. Those that are flying must go through extensive (and expensive) cleaning procedures.
United Airlines was burning through cash at a rate of $40 million a day from April through the end of June. The quasi “recovery” through the summer as lockdowns ended hasn’t looked a whole lot better. United’s daily cash burn decreased to $25 million — in what was traditionally its more profitable quarter. Roughly 6,000 United staff have voluntarily left with packages, while the company warns 36,000 positions remain at risk.
United Airlines has kept itself afloat through measures like issuing bonds and taking advantage of government loan programs. But that CARES Act money comes with catches that could impact UAL stock even if there is a sudden recovery, including limitations on stock buybacks.
While UAL shares have been slowly moving in the right direction after bottoming out in May, there will be no real recovery for any airline until a coronavirus vaccine is found.
And at this point, that is a moving target.
The Worst Performer Among Airline Stocks
Another big strike against an investment in United Airlines? As pointed out by InvestorPlace contributor Bret Kenwell, shares have been underperforming the competition in 2020. Even after recent gains, UAL is down 62% so far this year — that’s double the loss that some airline stocks have suffered.
Investing in any airline stocks in 2020 is a risky move. But if you are convinced there are gains to be reaped, why not minimize that risk? Pick an airline whose stock has performed better in 2020 than UAL stock. At this point, that is virtually any other airline stock.
Bottom Line on UAL Stock
It can be tempting to look at airline stocks and their seriously deflated 2020 prices and think that now is the opportunity of a lifetime. Snap up UAL stock under $39, and you’re buying at prices not seen since 2014. Just two years ago, this stock was flirting with $100. On the surface, that is some pretty compelling upside.
I’m convinced that now is just not the time to make a move. Yes, UAL is cheap. But the airline sector is struggling for survival. Companies like United Airlines have made it this far due in no small part to government bailout money and issuing bonds. However, CARES Act funding came with catches that could impact UAL stock’s price in the future. And it’s running out. The bonds have been downgraded to junk status.
For air travel to return to anything resembling normalcy — and the conditions where UAL stock was trading near $97 — the world needs to return to normal.
That means an effective coronavirus vaccine that has been widely deployed. It means passengers being comfortable with confined spaces once again. Consumers will need to have the money to fly, even though the pandemic has also triggered a deep recession. It means businesses shifting from the current model of remote video meetings back to in-person meetings and conferences. And it means getting fleets of planes that have been temporarily mothballed, and staff that have been furloughed, back into service.
In other words, it may take years for the airline industry to recover. There have already been bankruptcies and there could be more before this is all over. At this point, tempting as it may look, UAL stock is tough to recommend.
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.
Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation.