United Will Lose Money, so Buy the Stock: Analyst

CHARLOTTE, N.C. (TheStreet) -- As airlines look ahead to first-quarter results, analysts are generally optimistic even though United ( UAL) , the world's largest airline, is poised for a loss.

In the first quarter, typically a losing quarter for carriers, Deutsche Bank analyst Mike Linenberg sees a $300 million profit decline for United, reversing an estimated $300 million improvement in Delta's ( DAL) operating profit. Analysts surveyed by Thomson Reuters estimate United will report a loss of 96 cents a share. Nevertheless, Linenberg has a buy on the shares, as does Wolfe Trahan analyst Hunter Keay.

With United shares trading at $21.44 following Friday's close, Keay has a target price of $26, or five times estimated 2013 earnings, even though he anticipates a first-quarter loss of $336 million, the carrier's worst quarterly loss in three years, as well as 300 basis points of margin erosion.

"UAL's relative underperformance is likely to continue into the summer months as its new reservation system builds history and revenue managers learn the nuances of managing specific routes under a single operating certificate for the first time," Keay wrote, in a recent report. "But we think investors get this.

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"In fact, it seems like UAL has actually become a bit of a contrarian investment," Keay said. "Shares are still inexpensive relative to the group and to historical levels, free cash flow potential and debt paydown this year still feels widely underappreciated, and Delta's current PRASM outperformance gives optimists reason to believe that United will be in a similar position in early 2013.

"Just think of the easy comps," he added.

Overall, as Alaska ( ALK) and Southwest ( LUV) prepare to report earnings on Thursday, with other carriers to follow next week, the sector is flashing positive signs. March traffic reports were generally positive, with revenue per available seat mile trends improving, following disappointing February RASM numbers. Linenberg foresees first-quarter margin expansion at seven of the 11 carriers he follows.

Also, operational performance has been superb. In February, on-time performance was the best ever for February and baggage handling was the best for any month since tracking began, with just 2.64 mishandled bags per 1,000 passengers, the trade group Airlines for America reported. Operational performance does not correlate directly with profit, but strong performance directly reduces costs and also enhances customer morale.

Airline share performance so far this year has been mixed, with double-digit gains by three legacy carriers and declines by domestically focused carriers Alaska, JetBlue ( JBLU) and Southwest.

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US Airways ( LCC) leads the sector with a 50% gain, partially due to strong performance and partially to merger chatter. Because a merger with bankrupt AMR ( AAMRQ.PK) would likely lead to further capacity declines, Wall Street is increasingly supportive.

Linenberg considers 2011 to have been "a watershed year" for airlines because they prospered despite sub-2% GDP growth and a 40% increase in fuel costs.

"As such, we remain favorably disposed to the names that we believe are most leveraged to an industry that appears to be undergoing a secular change," he wrote, naming Delta, United and US Airways, as well as low-fare, low-cost carrier Spirit ( SAVE).

Overall, he estimated the industry will report net a net loss of $815 million, $100 million better than a year ago despite higher fuel costs, in what is typically its weakest quarter. Meanwhile, Maxim Group analyst Ray Neidl wrote, in a recent report, that he estimates the industry will have a small first-quarter loss preceding strong full-year results.

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"The U.S. industry is probably in the strongest position that it has been since deregulation due to three key factors which include industry consolidation, cost/capacity discipline, and the development of ancillary revenues from add-on fees," Neidl wrote. "The key remaining challenge for the legacy airlines is improvement of the balance sheets which would enable the market to value the legacy airlines at a higher multiple."

-- Written by Ted Reed in Charlotte

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