United Continental Holdings (NYSE:UAL) had generated strong performances in the last couple of quarters, thanks to solid fare rates and increasing traffic. UAL’s shares soared nearly 36% in the last three months alone, extending twelve-month growth to 42%. The company’s stock price increased significantly after its strong third quarter performance and aggressive expansion in share buyback plan.
In the third quarter, UAL reported net income of $965 million and diluted earnings per share of $3.01, the best in the company’s history. Despite negative growth in revenues, United Continentals cost cutting strategies and buybacks allowed it to generate record earnings.
UAL decreased operating expenses by 1.4% to $8.3 billion in the third quarter, while its consolidated unit cost declined 3.3% over the same period last year, thanks to lower oil prices.
On the other hand, United Continentals’ strategy of reducing the number of outstanding shares is adding considerable growth to the company’s earnings and share. In the latest quarter, it purchased 1.5% of outstanding shares, while the company lowered its outstanding shares by 20% since July 2014.
Moreover, UAL’s management seeks to buyback almost $2 billion of its stock in the coming quarters, which will provide additional support to future earnings potential and share price appreciation.
United Continentals potential to invest in growth opportunities is very strong considering its low cash returns for investors. The company does not offer any dividend at present, signifying the extensive potential to invest in growth opportunities. After capital investments, it generated free cash flows of $2.6B in the last three-quarters. Thus, the company is in a strong position to extend its buyback program, which is a key growth driver for its earnings and share price.
Several analysts have increased their price targets for UAL’s stock, supported by low valuations and strong fundamentals. Morgan Stanley thinks U.S. carriers are set to continue their supply discipline in 2017 even as the Trump administration potentially drives tax reform. In addition, Barclays says consolidation and capacity restraint point to sustained profitability in the sector.
The author has no positions in the above mentioned companies.