United Continental Holdings, Inc. (NYSE:UAL) shares are down more than -14.65% this year and recently decreased -0.62% or -$0.39 to settle at $62.20. Spirit Airlines, Inc. (NASDAQ:SAVE), on the other hand, is down -25.91% year to date as of 12/04/2017. It currently trades at $42.87 and has returned 9.59% during the past week.
United Continental Holdings, Inc. (NYSE:UAL) and Spirit Airlines, Inc. (NASDAQ:SAVE) are the two most active stocks in the Major Airlines industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect UAL to grow earnings at a -0.73% annual rate over the next 5 years. Comparatively, SAVE is expected to grow at a 0.40% annual rate. All else equal, SAVE’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return., compared to an EBITDA margin of 21.56% for Spirit Airlines, Inc. (SAVE). UAL’s ROI is 14.50% while SAVE has a ROI of 12.20%. The interpretation is that UAL’s business generates a higher return on investment than SAVE’s.
The value of a stock is simply the present value of its future free cash flows. UAL’s free cash flow (“FCF”) per share for the trailing twelve months was -1.81. Comparatively, SAVE’s free cash flow per share was -1.99. On a percent-of-sales basis, UAL’s free cash flow was -1.47% while SAVE converted -5.95% of its revenues into cash flow. This means that, for a given level of sales, UAL is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. UAL has a current ratio of 0.60 compared to 1.90 for SAVE. This means that SAVE can more easily cover its most immediate liabilities over the next twelve months. UAL’s debt-to-equity ratio is 1.55 versus a D/E of 0.84 for SAVE. UAL is therefore the more solvent of the two companies, and has lower financial risk.
UAL trades at a forward P/E of 9.68, a P/B of 2.08, and a P/S of 0.50, compared to a forward P/E of 13.34, a P/B of 1.89, and a P/S of 1.16 for SAVE. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. UAL is currently priced at a -11.31% to its one-year price target of 70.13. Comparatively, SAVE is 2.73% relative to its price target of 41.73. This suggests that UAL is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.60 for UAL and 2.30 for SAVE, which implies that analysts are more bullish on the outlook for UAL.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. UAL has a beta of 1.03 and SAVE’s beta is 0.71. SAVE’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.UAL has a short ratio of 2.05 compared to a short interest of 5.38 for SAVE. This implies that the market is currently less bearish on the outlook for UAL.
Spirit Airlines, Inc. (NASDAQ:SAVE) beats United Continental Holdings, Inc. (NYSE:UAL) on a total of 7 of the 14 factors compared between the two stocks. SAVE generates a higher return on investment, is more profitable, higher liquidity and has lower financial risk. Finally, DAL has better sentiment signals based on short interest.