Over the past six months, United Airlines has been a great trade, beating the S&P 500 by 8.1%. Its stock price has climbed to $95.22, representing a healthy 21.1% increase. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in United Airlines, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free for active Edge members.
Why Is United Airlines Not Exciting?
We’re glad investors have benefited from the price increase, but we don't have much confidence in United Airlines. Here are three reasons there are better opportunities than UAL and a stock we'd rather own.
1. Weak Growth in Revenue Passenger Miles Points to Soft Demand
Revenue growth can be broken down into changes in price and volume (for companies like United Airlines, our preferred volume metric is revenue passenger miles). While both are important, the latter is the most critical to analyze because prices have a ceiling.
United Airlines’s revenue passenger miles came in at 73.77 billion in the latest quarter, and over the last two years, averaged 6.1% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
United Airlines has shown poor cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 3.5%, lousy for a consumer discretionary business.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
United Airlines historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 9.4%, somewhat low compared to the best consumer discretionary companies that consistently pump out 25%+.
Final Judgment
United Airlines isn’t a terrible business, but it doesn’t pass our quality test. With its shares outperforming the market lately, the stock trades at 7.8× forward P/E (or $95.22 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're fairly confident there are better investments elsewhere. We’d recommend looking at the most entrenched endpoint security platform on the market.
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