Analysts Split on United's Outlook as the Carrier Comes Up Short Against Delta

United (UAL) beat fourth-quarter earnings estimates, but its guidance for first-quarter unit revenue, costs and margin disappointed some analysts and investors, reminding them that the carrier has long had a love-hate relationship with Wall Street.

United, which released earnings after the market closed on Tuesday, guided toward first-quarter revenue per available seat mile (RASM) between minus 1% and positive 1%, toward a first-quarter margin between 0.5% and 2.5%, and toward a first-quarter cost per available seat mile (CASM) excluding fuel increase between 4.5% and 5.5%.

Earnings were $1.78 a share, ahead of consensus of $1.73.

Delta ( DAL) , which reported last week, proved a tough act to follow. Last week, Delta guided toward current-quarter RASM between flat and up 2% and toward a margin between 11% and 13%. (Delta also said current quarter CASM would gain 5% to 7%.)

Regarding United's low margin, United spokeswoman Megan McCarthy said, "Seasonality has always been a factor in Q1 for United." United's earnings call is scheduled for 10:30 a.m. EST on Wednesday.

United shares, which gained 27% in 2016, closed Tuesday at $73.74, and have risen 1% year to date. 

"United's uninspiring Q1 guide is likely to be met with disappointment from the market, in our view, suggesting a level of RASM malaise inconsistent with recent share price gains," said JPMorgan analyst Jamie Baker in a note issued late Tuesday.

Baker called the pretax margin guide "disappointing," and said it would lead to current-quarter earnings between 8 cents and 42 cents a share; consensus is 41 cents. Baker thinks that will decline to about 30 cents a share as analysts revise their estimates.

Baker said the margin guidance suggests that "meaningful relative margin improvement continues to elude United's reconstituted management team." But he said it is the RASM number that is likely to trouble investors and analysts, although he noted that United's RASM has exceeded guidance for three consecutive quarters.

"While both fuel and ex-fuel CASM guidance are higher than anticipated, we'd have expected a pass from the equity market if accompanied by RASM closer to 2% (which we believe many buy-siders were looking for, despite sell-side expectations closer to flat)," Baker wrote.

Cowen & Co. analyst Helane Becker said she expects "choppy trading early this morning," noting "investor expectations were elevated for United's unit revenue guidance given recent positive guidance and 1Q guidance from Delta." For United, Becker has a market perform rating and a $75 price target.

Other analysts were more positive.

CFRA analyst Jim Corridore reiterated a strong buy and raised his target price to $86, while Deutsche Bank analyst Mike Linenberg reiterated a buy and a target price of $81.

"We see multiple expansion likely as UAL closes its discount vs. peers and as airlines see improved investor sentiment," Corridore wrote in a note. "UAL expects flat unit revenues in Q1, weaker than peer view, but still a positive trend in our opinion."

Linenberg said unit revenue, which declined 1.6% in the fourth quarter, is improving markedly from the 5.8% third-quarter decline. His current quarter projection is for 2.1% margin growth and earnings of 35 cents a share. "United closes 2016 with solid result {and expects} good PRASM heading into '17," he wrote.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.