United Airlines: Company Profile, Financial Analysis, and Projections and Valuations

Name
Course
Instructor
Date
United Airlines
1. Company Profile
United Airlines Holdings, Inc (UAL) is a company that provides air transportation services in the US and worldwide. Through the company's mainline operation, UAL provides quality air passenger and cargo transportation services. There are full-sized jet aircraft and smaller aircraft under the carrier. Besides passengers and cargo, ULA offers shipping services of trim packages and freight across the globe. However, United Airlines is mainly a domestic carrier operating across the various US and North American cities. The other markets are Latin America & Caribbean, Europe & Middle East, Africa, Asia & Pacific, and in Africa, the company only flies to South Africa. The company also offers ancillary services in the US and is headquartered in Chicago.
The company's stock has been was a downward trend from January 2020 to May 2020 but has risen slightly since then. In January 2020, the stock price ranged from $ 74.8 to $ 89.74, but in January 2021, the stock went from $40.74 to $45.85 (Yahoo Finance). Other companies also experienced losses and a fall in the stock value when the pandemic hit the US. When compared to the company's competitors, UAL had a smaller percentage increase in the stock value.
Among the company's closest competitors are American Airlines, JetBlue Airways, Southwest Airlines, and Delta Air Lines. American Airlines' stock had increased gradually in the last quarter of 2020, and the company's stock was $12.56 on 1st October and increased to 15.77 by December 2020 and $ 23.90 by 31st March 2021, which was almost double the value six months prior (Yahoo Finance, 2021). JetBlue Airways stock was $ 11.46 and $ 14.54 on 1st October 2020 and 31st December 2020 and had increased to $ 20.34 on 31st March 2021, respectively. Southwest Airlines stock increased from 46.61 on 31st December 2020 to 61.06 on 31st March 2021, while in the same period, the stock for Delta Air Lines increased from $ 40.21 to $ 48. 83 (Yahoo Finance, 2021). The Delta Air Lines stock was the second worst-performing stock after United Airlines when considering the percentage change in value.
2. Financial Analysis
After identifyingthe most crucial financial information presented by the United Airlines Company in the 2020 financial year, ratio analysis is provided based on data from the income statement and balance sheet. Owens reports that in the first three months of 2021, United Airlines Holding has already lost more than $ 1.3 billion. Still, the management argues that there are now more open international routes for vaccinated passengers. The company’s revenue was USD 3.22 billion for the three months compared to USD 7.98 billion in 2020, indicating that thecompany suffers record losses by the end of the year (Owens). As United Airlines missed expectations, the stock’s value is likely to decline in the coming months.
Income Statement (appendix)
Sales growth was 9.31% in 2018 but increased to 4.74% the following year-end decreased by -64.50% in 2020. The total operating income decreased from USD 43 259M in 2019 to USD 15,355 M in 2020. Whilethe total operating expenses also reduced, the revenue declined at a higher rate, so the company reported a loss.
In 2020, the company recorded a gross profit margin of -32.76%, against 28.83% and 26.81% in 2019 and 2018, respectively.
The salaries and related costs largest share of the operating expenses accounting for 43.85% of these expenses in 2020, far higher than 2019 and 2018. Meanwhile, passenger revenue accounted for almost 75% of the total operating income in 2020 and more than 90% in 2018 and 2019.
Balance Sheet (appendix)
As of December 2020, the company valued the total current assets at USD 14,800 M, which increased from 8,194 M in 2019, which was an 80 % increase. Current assets increased ascash and cash equivalents increased. Meanwhile, there was a decrease in the value of the other items. Other assets also increased from $49,024 M in 2018 to 52,611M in 2019 and 59,548 M in 2020.
The total current liabilities increased from 2018 to 2019 but then declined in 2020, but there was an increase in the current maturities of long-term debt, operating expenses, and finance expenses. There was also an increase in the long-term and $ 12,215 million, $13 145 M, and $ 24 836 million in 2018to 2020, respectively.
Additional capital invested increased by 36.5% from $ 6,129 million in 2019 to $ 8,366 million in 2020, while the repurchase of common stock was $1,235 million in 2018, $ 1,645 million in 2019, and 353 million in 2020. The retained earnings decreased from $ 9,716 million in 2019 to $ 2,626 million in 2019
Cash Flow Statement (appendix)
The amount of net cash produced by (and used in) operating activities decreased from 6,909 million in 2019 to ($ 4,133) million in 2020
The change is due to reporting a net (loss) of $ (7,069) million, deferred income benefits of $ 1741 million, and a decrease in the accounts payable (SEC, 2021).
The Cash used by investing activities increased to $ 50 million in 2020 compared to the amount used in 2019 at $ (4560) million and $ (4,455) million in 2018. The difference was in reducing the capital expenditure from $ 4,528 million in 2019 to $1,727 million in 2020 and reduced purchases of short-term and other investments. There were no loans to others in 2020.
In the past three years, capital expenditures werethe highest in 2019 at $ 4,528 million ads decreased to $ 1,727 million (SEC, 2021).
Then bet cash provided by (used in) financing activities in 2020 was 12,957 million in 2010 form $ (1,280) million in 2019., the difference was mainly due to Proceeds from issuance of debt as this was 0roceeds from issuance of debt $ 16,044 million in 20202, and 1,847 million in 2019.
Ratio analysis
Liquidity Ratios




 

Dec 31, 2020

Dec 31, 2019

Dec 31, 2018

Current ratio

1.16

0.55

0.51

Quick ratio

1.09

0.48

0.44





Solvency Ratios




 

Dec 31, 2020

Dec 31, 2019

Dec 31, 2018

Debt Ratios




Debt to equity

5.5

1.77

1.97

Debt to assets

0.55

0.39

0.4

Debt-to-EBITDA

-6.13

2.99

3.65









Profitability Ratios




 

Dec 31, 2020

Dec 31, 2019

Dec 31, 2018

Return on Sales




Gross profit margin

-32.76%

28.83%

26.81%

EBITDA Margin

-34.79%

15.83%

13.12%

EBIT Margin

-41.41%

9.94%

7.82%

Return on Investment




Return on equity (ROE)

-80.83

27.9

22.6

Return on assets (ROA)

-12.61

5.92

4.64





Trend Analysis Ratios





Dec 31, 2020

Dec 31, 2019

Dec 31, 2018

Revenue Growth

-64.50%

4.74%

9.31%

Operating Expense as % of Revenues

141.41%

90.06%

92.18%

The liquidity position improved in 2020 compared to the previous two years, while the company increased the debt burden and relied more heavily on debt financing. The current ratio is calculated by dividing existing assets by current liabilities. If the current liabilities increase faster than the existing assets, the current balance will decrease and vice versa. There are no concerns about the company's ability to pay the short-term obligations as the current ratio is above 1. When current liabilities increase faster than the existing assets, the current ratio will decrease and vice versa. In the quick or acid test, the ratio is determined after subtracting inventories from current assets and dividing the remaining sum by current liabilities. The company had a lower current ratio than the average for its industry.
The ROE and ROA were both negative, indicating the shareholders did not get returns as the company returned losses revenue growth was -64.50%, and the operating expense as % of revenues was 141.41%. The company’s performance is directly linked to the coronavirus pandemic.
3. Projections & Valuations
• Projections and Valuation Analysis for your assigned public company using Excel. The valuation analysis should calculate the assigned companies Enterprise Value using the following three methods of valuation:
Enterprise Value (EV)=MC+ Total Debt−C
MC=Market capitalization: current stock price multiplied* the number of outstanding stock shares
"Total debt=Equal to the sum of short-term and long-term debt
C=Cash and cash equivalents; the liquid assets" ofa company, but may not include marketable securities​
Method #1 (current stock price to calculate the EV) uses the stock price of $ 43.25, which was UAL’s value on 31st December 2020, and the EV was determined as 34,969 million. The method uses the market value of the shares at the end of the 2020 fiscal year.
Method #4 (based on current trading peer comparable) also determined the share prices as damaging as the 2020 sales figure, and multiples were used. It was an unusual year in which the industry suffered an abnormally high loss level across the board,
For Method #6 (DCF Analysis), the EV was determined as -37,522 million. The DQYDJ reported that in 2020 the average S& P 500 return was 15.76%, and this was used as the return available on an appropriate market benchmark investment. In 2020 the company and the airline industry suffered losses because of the Coronavirus (covid-190) pandemic. There was reduced air transport and social distancing, measures, and lockdowns that meant a significant drop in demand for airline services. Consequently, there was a loss, and the EV is determined as a negative value. It is not a surprise as there was a lossand the EPS 2020was -$ 25.30. The stock price value was determined as -$ 189.22. Realistically, this is impossible to get hostile stock prices. Since method 6 considers the earnings and loss, the results are skewed by UAL suffering considerable losses in 2020.
The Enterprise Value (EV) is the company's value as a whole, and this is the value investors, shareholders, suppliers, and financial creditors. The highest valuation is Method #1, which is the market value/stock price method based on the three valuation methods utilized. The highest valuation is still well below the trading price, which has gone as high as $ 62.45 on Mar 17, 2021.
The industry’s Enterprise Value EBITDA multiple was determined as 6.42 higher than the company’s EV EBITDA multiple, partly because the company experienced a drastic fall in profitabilitycompared to the industry peers whose losses were not by large margins as United Airlines. Earnings per share (EPS) is when the company's profit is allocated to the outstanding shares. It indicates a company's profitability and the net loss resulted in negative EPs, unlike the previous five years.
Results
Based on three methods, United Airlines stock is overvalued, and on 19th April 2021, the stock was trading at 54.99, higher than the ending stock pricein 2020. Despite suffering considerable losses in 2020 and the first quarter of 2021, the stock value has risen. The current stock price is higher than the average price for the three methods. Thus, I would recommend selling the company's stock. The company’s stock is currently trading at $359.57, which is 26% above $286.05, the average of the three methods. Therefore, selling United Airlines stock is recommended.
4. Technical Analysis
The beta coefficient is 1.66981 (1.70), and this implies that in the short-term, the returns are 1.7 times that of the market return. The stock's excess return also means that it is a more volatile stock than the market. The beta for 2020 is determined using the covariance for the stock and the S & P 500 return (0.000817) divided by the variance of the stock return (0.000489)
Works Cited
DQYDJ,2020 S&P 500 Return.2020. https://dqydj.com/2020-sp-500-return/
Owens, Jeremy. "United Airlines Lost More Than $1.3 Billion To Start The Year, And The Stock Is Falling". Marketwatch, 2021, /story/united-lost-more-than-1-3-billion-to-start-the-year-and-the-stock-is-falling-11618865978.
SEC. United Airlines Holdings, Inc. and Subsidiary Companies United Airlines, Inc. and Subsidiary Companies Annual Report on Form 10-K For the Year Ended December 31, 2020
Yahoo Finance. United Airlines Holdings, Inc. (UAL). 2021https://finance.yahoo.com/quote/UAL?p=UAL&.tsrc=fin-srch
Appendix
UNITED AIRLINES HOLDINGS, INC.
STATEMENTS OF CONSOLIDATED OPERATIONS
(In millions, except per share amounts)



Year Ended December 31,





2020




2019



2018


Operating revenue:










Passenger revenue

$

11,805

$

39,625


$

37,706


Cargo


1,648



1,179



1,237


Other operating revenue


1,902



2,455



2,360


Total operating revenue


15,355



43,259



41,303


Operating expense:










Salaries and related costs


9,522



12,071



11,458


Aircraft fuel


3,153



8,953



9,307


Depreciation and amortization


2,488



2,288



2,165


Landing fees and other rent


2,127



2,543



2,449


Regional capacity purchase


2,039



2,849



2,649


Aircraft maintenance materials and outside repairs


858



1,794



1,767


Distribution expenses


459



1,651



1,558


Aircraft rent


198



288



433


Special charges (credit)


(2,616)



246



487


Other operating expenses


3,486



6,275



5,801


Total operating expense


21,714



38,958



38,074


Operating income (loss)


(6,359)



4,301



3,229












Nonoperating income (expense):










Interest expense


(1,06)



(731)



(670)


Interest capitalized


71



85



65


Interest income


50



133



101


Unrealized gains (losses) on investments, net


(194)



153



(5)


Miscellaneous, net


(1,32)



(27)



(72)


Total non-operating expense, net


(2,46)



(387)



(581)


Income (loss) before income taxes


(8,82)



3,914



2,648


Income tax expense (benefit)


(1,753)



905



526


Net income (loss)

$

(7,06)


$

3,009


$

2,122












Earnings (loss) per share, basic

$

(25.3)


$

11.63


$

7.70


Earnings (loss) per share, diluted










$

(25.3)


$

11.58


$

7.67












UNITED AIRLINES HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except shares)


On December 31,


ASSETS


2020


2019


Current assets:






Cash and cash equi...