Thursday, July 5, 2012

UAL: A slow and painful take-off

United Continental Holdings Inc. (UAL) runs the third and sixth largest airlines in the world measured by passenger kilometers flown: No. 3 United Airlines and No. 6 Continental Airlines. The Chicago, Illinois company operates more than 5,600 flights a day to 370 destinations in the U.S. and abroad.

On the chart, UAL's price has been on a slow and painful take-off since hitting a low of $15.51 in November 2011, inching up toward the post-crash high of $29.75 in 2010 in a progress marked by many deep corrections.

The chart perfectly illustrates the saying "Two steps forward, one step back". United Continental is a tortoise, not a hare.

In the current leg up, the price peaked at $25.50 on May 31, retraced down to $21.85 on June 13, rose to $24.84 on July 2, and  in the ensuing two trading days has fallen to today's low (so far) of $23.13.

A break above $24.84 for suggest the uptrend is continuing, and above $25.50, would be a strong confirmation. A drop below $21.85 would suggest that the uptrend was no longer in force.

UAL has an enthusiasm index among brokerages of 58% unchanged from a month earlier. I build the index by giving positive weight to strong buy recommendations, negative weight to holds and sells, and ignoring buys.

That rating mirrors the company's performance. It has a 23% return on equity -- growth stock territory -- but that is marred by a crushing load of long-term debt amounting to more than eight times equity.

High levels of debt aren't unusual among major airlines. It takes a lot of capital investment to run that sort of business. Even among that group, though, UAL's is on the high side.

Quarterly earnings are all over the place. Five of the last 11 quarters has shown a loss. Five of the last six quarters has shown upside earnings surprises, and one has surprised to the downside. There's no trend to earnings, showing the sensitivity of airline profits to the fickle public mood.

Institutions own 99% of shares -- a strong vote of confidence -- and the stock is extremely cheap. It takes just 17 cents in shares to control a dollar in sales.

On average, UAL trades 4.4 million shares a day, sufficient to support a good selection of options with high open interest and narrow bid/ask spreads.

Implied volatility stands at 51% and has been declining in a series of large zigs and zags since mid-May. Options are pricing in confidence that 68.2% of trades will fall between $20.10 and $27.04 during the next month, for a maximum gain or loss of 15%.

Put options are trading at volume 80% above the five-day moving average, and calls are at 6% above the moving average.

The current price is below the five-day fair-trade range, which encompasses 68.2% of trades over that period. The range runs from $23.67 to $24.46, and the most-traded price is $23.99. Typically, a price that is below the range will move back to within it, unless the directional trend has changed.

United Continental next publishes earnings on July 16.

Decision for my account: The last two days have been down, both inter- and intra-day. I would consider opening a short-term bullish position in UAL if I were to see an intra-day rise setting both a higher high and higher low compared to the day before. A fall below $21.85 would negate the rationale for the trade, and I would set my stop/loss slightly below that level, or perhaps even just below $23, which is the lowest low of the very near term, recorded June 25.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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