On Tuesday, UBS initiated coverage on shares of United Continental (NASDAQ:UAL) with a Neutral rating and a price target set at $47. The firm recognized United Continental's improved competitive positioning, its increased focus on the faster-growing premium travel segment, and the long-term potential for margin enhancement as positive factors. Despite these advantages, UBS has chosen to remain on the sidelines due to two primary concerns.
The first issue highlighted by UBS is the expectation of subdued free cash flow (FCF) for United Continental in the near term, attributed to slowing yet still significant capital expenditures. UBS projects that even under an optimistic scenario with annual capital expenditures of $6 billion, United Continental's FCF yield would range between 5-10%. This figure stands in contrast to the FCF yields of 13-14% for Delta Air Lines (NYSE:DAL) and approximately 20% for American Airlines (NASDAQ:AAL).
The second concern involves the limited upside to United Continental's out-year margin estimates. Consensus estimates already predict a considerable increase in pretax margins, from 7.3% in the fiscal year 2024 to 9.1% in the fiscal year 2026. UBS's estimates align with these expectations at 9.1%. However, UBS's "what's priced in" analysis indicates that the market has already accounted for an EBITDAR of $8.8 billion in 2025, which is closely aligned with UBS's own estimate of $9.1 billion. This suggests that there is limited potential for stock price appreciation based on these margin expectations.
The firm's neutral stance reflects these concerns, indicating a cautious approach to United Continental's stock at the present time. The airline industry has been facing various challenges, and UBS's analysis provides a measured perspective on United Continental's financial prospects amid these conditions.
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