UAL (UAUA: Nasdaq)
By JPMorgan ($5.07, July 18, 2008)
SHARES OF UAL (ticker: UAUA), the parent of United Airlines,] have fallen too fast and furiously, implying a higher risk of near-term bankruptcy than justified, in our view.
[We are upgrading shares to Overweight from Underweight.]
While not for the meek, we strongly recommend purchase of shares in advance of next week's conference call, which may be accompanied by significant capital announcements.
This isn't a sector call. We continue to believe a "Buy The Survivors" call is premature, given the continued war of attrition that most remain engaged in. But that shouldn't prevent us from making relative value calls.
To that end, we believe shares in United have been unfairly punished, and may potentially stand poised for a significant, near-term bounce.
We believe incremental capital raising is imperative for United. And we readily concede that in the complete absence of such efforts, United's prospects appear grim. But just how likely is that?
[uaua]
Numerous carriers have readily proven that the capital markets do in fact remain open for airlines. It is unclear why this would not similarly prove true for United, assuming management acts quickly.
Put differently, only in the utter absence of incremental capital or accompaniment of air-related terrorism can we foresee a 2008 United bankruptcy filing.
But the market apparently disagrees. United's market capitalization continues to rest some 4% below where its predecessor's sat just six-months before filing Chapter 11. We won't argue that Chapter 11 remains one of several potential outcomes in 2009 (likely toward the back-half).
But we strenuously disagree with the market having come to this conclusion with such ferocity, while failing to give United management credit for the runway that we believe remains available.
What do AirTran (AAI), [American parent] AMR (AMR), Continental (CAL), JetBlue (JBLU) and Southwest (LUV) have in common? They've all undertaken substantive capital efforts in recent months. We've already identified the need for United to do the same; the only question appears timing and magnitude.
We would be surprised (and disappointed) if United didn't announce at least $1 billion of incremental borrowing, possibly as early as Tuesday.
We're not embracing fundamentals. Sure, United entered the downturn with both lower liquidity levels (absolute and as a percent of trailing revenue) and lower margins than its legacy peers.
And we are on record with our general lack of enthusiasm for its cost control capability. This isn't a recommendation predicated on a renewed embrace of management or significantly revised fundamentals. In fact, our estimates remain untouched.
But we also point out -- to United's credit -- that it is already subject to a stiff credit-card processing holdback of 25%, whereas most others remain (for now) with zero holdbacks. For some, this may be viewed as a negative. To us, it suggests less incremental risk to United than, say, AirTran, which is poised to renegotiate its contract early next year.
