In the midst of the airline industry's recent stock-market bludgeoning, United Continental (NYSE: UAL) CEO Jeff Smisek stepped in to make a significant investment in his company. While this clearly signals Smisek's confidence in the company, United's subpar earnings trajectory gives investors plenty of reasons to be skeptical about its future.
A bit of rough air
After performing extremely well in the first half of 2013, airline stocks hit heavy turbulence this month. The main culprit has been the Department of Justice's decision to challenge the proposed merger between AMR (UNKNOWN: AAMRQ.DL ) and US Airways (NYSE: LCC ) . This antitrust case spooked many investors, and led to a rapid correction in many airline stocks. The rising prospect of military action by the U.S. and other Western powers in Syria worsened matters by causing fuel prices to jump higher .
United, the world's largest airline, has been hit particularly hard. Shares have tumbled more than 20% since hitting a 52-week high in late July.
A good sign for investors?
According to a recent regulatory filing, Smisek spent approximately $250,000 to purchase more than 9,000 United Continental shares in the open market on Tuesday . This brings his total holdings of company stock to nearly 445,000 shares, worth more than $12 million at Thursday's closing price of $28.50.
Smisek's investment in United is definitely a good sign for investors. While there are many potential reasons for insiders to sell stock that they have acquired through stock options, they generally only buy more stock if they think shares are headed upwards .
As CEO, Smisek should have the best view of United's prospects. If he thinks the stock is undervalued, other investors should definitely consider his perspective. That said, Smisek has held hundreds of thousands of shares through all of United's ups and downs, so he hasn't been the best predictor of the company's fortunes over the past few years.
In fact, United seems poised to continue underperforming the rest of the airline industry. Airline analyst Jamie Baker of J.P. Morgan pointed out last month that United's earnings have declined year over year for nine consecutive quarters.
Analysts expect the company to break that ugly streak this quarter, but estimates have been on a downward march over the past 90 days. The average Q3 earnings estimate has dropped by 13% in that time period .
With oil prices on the rise recently, those estimates could continue to slide. Last month -- when oil prices were lower -- United projected that unit costs would rise 3%-3.6% in Q3 . Meanwhile, unit revenue is expected to grow by 3%-5 %. If unit cost growth is trending toward the high end of the guidance range due to higher fuel prices, United will likely be unable to achieve the 250-300 basis points of margin expansion necessary to meet Q3 analyst estimates. Profitability in Q4 and in 2014 is also likely to fall short of most investors' current expectations.
Foolish bottom line
CEO Smisek clearly thinks that United Continental has weathered the storm of integration and that better times are ahead. That's the only plausible explanation for why he just spent $250,000 of his own cash on United stock.
However, United's profitability has lagged far behind that of competitors recently. While the carrier has been posting unit revenue growth in line with other major carriers this year, its costs are increasing faster than at rivals.
Moreover, Smisek has a history of being overly optimistic. For example, after United and Continental merged in October 2010, he set a goal of completing joint collective bargaining agreements for all of the work groups by the end of 2011 . Nearly two years after that deadline, only the pilot work group has an approved joint contract.
Investors should thus be wary of following Smisek into United Continental stock. The company may be ready to turn the corner, but it is still miles behind most of its competitors. As a result, the stock still does not look attractive.
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