Option Trade
United Continental Holdings Inc (NYSE:UAL) Calls
Tuesday, June 13, 2017

** OPTION TRADE: Buy the UAL SEPT 15 2017 80.000 CALL at approximately $3.50. Place a pre-determined sell at $7.00.

Note: No protective stop losses added -- but if you wish to do so make it $1.40.

Also Note: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

by Ian Harvey   

U.S. airliner United Continental Holdings Inc. (NYSE:UAL), the Chicago-based parent company of United Airlines, has weathered the recent debacle experienced at O’Hare, and has actually been climbing higher as of late.

And given that the UAL stock is still priced attractively at 10 times earnings, which is in-line with airline peers American Airlines Group Inc (NASDAQ: AAL ) and Delta Air Lines, Inc. (NYSE: DAL ), UAL can still fly higher.

United not only are fundamentals strong, but oil prices look to be kept in check—thanks largely to soaring shale production—while a top 25% industry rank for the airline industry at large suggests broad strength across the space.

So, UAL is a strong consumer name that is able to overcome public relation issues and march higher nonetheless. It has moved up into ‘strong buy’ territory, so providing an impressive story for this options play.

United Continental Holdings is expected to announce its next quarterly earnings report on Tuesday, July 18th. Equities research analysts predict that UAL will report earnings per share of $2.20 for the current quarter. Five analysts have issued estimates for United Continental Holdings’ earnings, with the highest EPS estimate coming in at $2.30 and the lowest estimate coming in at $2.03.

As well, analysts expect that United Continental Holdings will report full-year earnings of $7.19 per share for the current fiscal year, with EPS estimates ranging from $6.70 to $7.86. For the next year, analysts expect that the company will report earnings of $8.41 per share, with EPS estimates ranging from $7.35 to $9.25.

United Continental Holdings’s 50-day moving average price is $74.72 and its 200-day moving average price is $72.56. United Continental Holdings has a 52-week low of $37.41 and a 52-week high of $81.96. The company has a market cap of $25.00 billion, a price-to-earnings ratio of 12.62 and a beta of 0.58.

Influencing Factors to Consider

Shares of United just hit fresh highs, and revenues remain on the right track, expected to grow at modest levels for both this year and next year. The company has also seen rising earnings estimates as of late too, including several estimate increases in just the past week alone.

And for the current year and next year time frames, we actually haven’t seen any analysts reduce their estimates at all (in the past two months), suggesting there is total agreement about United’s improving story. Plus, with the consensus estimate having moved up by over 5% for both the current year and next year, the magnitude of the increase has also been impressive too.

It isn’t like United has a difficult time in meeting expectations either, as the company has missed earnings estimates once since late 2013, and it hasn’t missed at all since the start of 2016.

United Continental Holdings, Inc. posted traffic numbers for the month of May. Traffic – measured in revenue passenger miles (RPMs) – was 18.5 billion, up 2.6% from 18 billion recorded a year ago.

On a year-over-year basis, consolidated capacity (or available seat miles/ASMs) inched up 3.7% to 22.7 billion. Consequently, load factor (percentage of seats filled by passengers) decreased to 81.6% from 82.5%, a year ago. This was because capacity expansion outpaced traffic growth.

At the end of the first five months of 2017, the carrier has recorded a 3.3% increase in RPMs to 83.7 billion, while ASMs grew 3.1% to 103.6 billion, both on a year-over-year basis. Load factor increased 20 basis points to 80.8% in the period as traffic growth outpaced capacity expansion.

The company posted an on-time performance of 70.3% and a completion factor of 99.8% for May. According to United Airlines President Scott Kirby, the carrier was the top performer in the industry for on-time departures in May for a second consecutive month.

The company’s expectation for consolidated passenger unit revenue in second-quarter 2017 remains unchanged at an increase of 1% to 3%, compared to the second quarter of 2016.

Buffett, who's known for valuing monopolies, has also became one of the largest investors in UAL. In the most recent quarter, the company posted fully diluted net income of $96 million, 31 cents per share, on revenues of $8.4 billion. Revenue was up 2.7% year over year. And adjusted EPS topped Wall Street's estimates by 3 cents. As with its peers, UAL is benefiting from fewer unsold seats and an ability to charge for checked bags and other amenities that were once free.

Notably, immediately after the passenger scandal emerged, United issued a second-quarter forecast that calls for up to 3% revenue growth, which immediately told investors that the company doesn't expect the scandal impact its performance. Furthermore, United guided for pre-tax operating margins of 10% to 12%, which at the midpoint, was above Street estimates. Not to mention, it's a confident guide, especially after the company took a 5% charge in costs excluding fuel and profit sharing.

Analysts and Hedge Funds Opinions

United Continental Holdings has a consensus outperform rating from 16 Wall Street analysts, and the number of shares currently sold short amount to at least 4.46% of shares outstanding. The stock spiked 0.36% last month and is up 8.16 this year.

Wall Street is only getting more bullish on the stock, with 9 of the analysts who cover UAL having a buy-equivalent rating. Analysts have placed an $87.69 price target on United Continental Holdings, Inc., suggesting an 11.24% gain from recent close.

Several institutional investors have recently made changes to their positions in the stock…..

  • BlackRock Inc. raised its position in shares of United Continental Holdings by 4,642.3% in the first quarter. BlackRock Inc. now owns 22,075,033 shares of the transportation company’s stock worth $1,559,382,000 after buying an additional 21,609,536 shares during the period.
  • Vanguard Group Inc. raised its position in shares of United Continental Holdings by 0.6% in the first quarter. Vanguard Group Inc. now owns 21,776,181 shares of the transportation company’s stock worth $1,538,270,000 after buying an additional 138,457 shares during the period.
  • State Street Corp raised its position in shares of United Continental Holdings by 7.3% in the fourth quarter.

Harvey’s Options Volatility Indicator


With estimates still showing healthy gains, UAL stock is showing no signs of weakness , especially after shares are now back above their 200-day average.

With almost $4.4 billion in cash and short-term securities and another $6 billion in operating cash flow, which is superior to several peers, UAL stock has great qualities.

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

 ** OPTION TRADE: Buy the UAL SEPT 15 2017 80.000 CALL at approximately $3.50. Place a pre-determined sell at $7.00.

Note: No protective stop losses added -- but if you wish to do so make it $1.40.

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