Why the Numbers Just Don't Add Up to Buy United Airlines

It seems as though every month the improving fundamentals in the airline sector make it worth scouring the group for a cheap pick. Inevitably, United Airlines (NYSE: UAL  ) pops up on the list with either a low price-to-sales multiple or a lagging stock price. Every time, though, the numbers just don't justify buying the stock.

United Airlines is now the second-largest domestic airline in terms of revenue behind the new American Airlines Group (NASDAQ: AAL  ) . United operates more than 5,300 flights a day to more than 360 airports across six continents.

United Airlines sits in the precarious position of being squeezed between American Airlines and Delta Air Lines (NYSE: DAL  ) , that is, between the exemplars of size and operational efficiency. While the new American Airlines only began trading in December 2013, the stock of United Airlines has greatly underperformed since then, and over the last year United Airlines' share price has struggled compared to Delta's.

UAL Chart

UAL data by YCharts

The general consensus would be that United Airlines might offer some catch-up value, but the numbers below suggest otherwise.

Weak first quarter
Everybody knows that the polar vortex this past winter iced airline operations during the first two months of the year, but United Airlines remains the only legacy airline expecting a loss for the first quarter. The airline operates hubs in similar airports to the other legacy airlines providing prime example of the weak operations.

Analysts on average expect a substantial loss of $1 per share for United Airlines while both Delta and American Airlines expect solid profits. In the case of United, analysts have constantly lowered first-quarter numbers, while both Delta and American saw estimates remain flat to up during the severe winter.

During February alone, United Airlines cancelled 11,000 flights -- the equivalent of two days worth of flights. The cancellations led to revenue passenger miles decreasing 0.3% during the month. With capacity dropping at a faster 0.9% pace, the good news was that load factor gained 0.5 points during the month to reach 79.2%. While increasing the load factor is typically good, in this case it isn't; declining revenue and capacity isn't a good sign when other airlines were able to increase capacity despite the weather. Investors can review more detail on the importance of these metrics here.

Where the disappointment really hits home is that American Airlines was in the third month under the new corporate structure and still had integration issues to work out. Despite this, the airline added 0.8% to capacity and saw revenue passenger miles increase 0.5%. American did see the load factor dip slightly, but it still stood at a decent 78.4%. More importantly, the airline forecasts passenger revenue per available passenger seat mile to gain 2%-4% for the quarter.

Comparative valuation unattractive
At a valuation of only $15.2 billion, United appears attractive at a first glance compared to the huge $26.1 billion market cap of Delta Air Lines. Using the price to sales multiple, United only trades at 0.4 times sales compared to Delta's 0.7 times sales. In essence, each dollar of revenue at Delta generates nearly twice the value.

The problem is trying to compare United to American Airlines, though. American is just starting to work through a merger that is hiccup-free so far and survived the polar vortex winter without any noticeable problems. The company's stock trades at a smaller 2015 earnings multiple than United's of only six times, yet it expects synergies over the next couple of years to increase earnings. With respected investing icon James Dinan of York Capital Management forecasting American Airlines to generate earnings of $6 per share in 2015 that would place the stock trading at only five times earnings, it's hard for an investor to pick the smaller and underperforming United that trades at a higher earnings multiple of seven times expected 2015 numbers.

Bottom line
On most metrics, United Airlines appears attractive. This is especially true with the airline industry continuing to prosper and most of the market only now catching on to that trend. Unfortunately, P/E multiples suggest that the company's stock doesn't provide the value that American Airlines offers. While wanting to justify buying United Airlines, it appears that American Airlines remains the best value among the legacy carriers trading at a lower earnings multiple, so the monthly review will continue until the numbers add up for United.

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