In this article, I evaluated United Airlines Holdings, Inc. (UAL) and Air Canada (ACDVF) to determine the potential travel stock for 2024. After thoroughly evaluating these stocks, I think ACDVF might be a superior choice for the reasons discussed in this article.
The global airline industry is projected to grow at a CAGR of 25.5% until 2027. The sector is expected to grow in the next few years, owing to rising disposable income, rapidly growing middle class, and increased travel demand. Furthermore, the price of jet fuel is expected to stay relatively stable, allowing airlines to levy surcharges and earn additional revenue from passenger and freight transport.
Furthermore, despite the unprecedented impact of the pandemic, the airline sector has largely rebounded thanks to the pent-up demand for travel. The International Air Transport Association (IATA) anticipates that the sector's net profits will reach $25.70 billion in 2024, with a 2.7% net profit margin. This reflects a marginal improvement from the upwardly revised projections for the current year.
UAL declined by 1% over the past nine months compared to ACDVF’s 5.6% gain. The stock has gained 7.7% over the past month compared to ACDVF’s 11% gain.
Here are the reasons why I think ACDVF might perform better in the near term:
Recent Developments
On November 30, UAL revealed a $2.6 billion renovation and expansion of Terminal B at George Bush Intercontinental Airport (IAH). Aligned with the United Next growth plan, this involves adding 40 gates at IAH to accommodate larger aircraft, leading to a 40% year-over-year surge in peak travel capacity by 2026.
Such strategic investments position UAL to meet growing demand and enhance operational efficiency, fostering a competitive edge and bolstering its stature in the airline industry.
Conversely, On December 1, 2023, ACDVF introduced a new feature to the Air Canada mobile app to enable customers traveling within Canada to track the progress of their baggage and mobility aid in real time at key points as it moves with them throughout their journey. The new tracking feature was designed to provide travellers with added confidence and improve the overall customer experience through greater convenience.
On November 14, 2023, ACDVF announced it was strategically boosting its Asia-Pacific network capacity beginning mid-December through to the end of next summer 2024.
Recent Financial Results
UAL’s total operating revenue increased 12.5% year-over-year to $14.48 billion for the third quarter that ended September 30, 2023. Its adjusted EBITDA grew 17.5% from the year-ago value to $2.44 billion. Also, non-GAAP net income and non-GAAP EPS rose 30.9% and 29.9% from the prior year’s period to $1.21 billion and $3.65, respectively. However, total operating expenses increased % year-over-year to $12.75 million.
On the contrary, during the fiscal third quarter that ended on September 30, 2023, ACDVF’s total revenues increased 19.2% year-over-year to CAD6.34 billion ($4.80 billion). Its net income came in at CAD1.25 billion ($ 946.16 million), compared to a net loss of CAD508 million ($384.52 million) for the year-ago quarter. Its net income per share came in at CAD3.08 as compared to negative CAD1.42 in the year ago quarter.
Past And Expected Financial Performance
Over the past three years, UAL’s revenue increased at a 32% CAGR. Analysts expect UAL’s revenue to increase by 19.3% this year and 9.3% in the fourth quarter ending December 2023. Its EPS is expected to increase 287.1% in the current year but decline 31.5% over the fiscal fourth quarter (ending December 2023).
Conversely, ACDVF’s revenue has increased at a CAGR of 31.3% over the past three years. Its revenue is expected to increase 30.4% in the fiscal year ending December 2023 and 8.6% in the fiscal fourth quarter ending December 2023. Its EPS is expected to rise 92.5% in the fiscal fourth quarter ending December 2023.
Valuation
UAL’s forward EV/EBITDA multiple of 4.21 is higher than ACDVF’s 3.24. UAL’s forward EV/Sales multiple of 0.62x is higher than ACDVF’s 0.60x.
Thus, ACDVF is more affordable.
Profitability
UAL’s trailing-12-month gross profit margin of 33.94% is lower than ACDVF’s 33.30%. In addition, UAL’s trailing-12-month levered FCF margin of negative 1.09% is lower than ACDVF’s 5.30%.
Thus, ACDVF is more profitable.
POWR Ratings
UAL has an overall rating of C, which equates to a Neutral in our proprietary POWR Ratings system. Conversely, ACDVF has an overall rating of A, translating to Strong Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. UAL has a C grade for Quality. Its trailing-12-month gross profit margin of 39.94% is 12.1% higher than the industry average of 30.28%. However, its net income margin of 5.45% is 10.5% lower than the industry average of 6.09%.
On the other hand, ACDVF has an A grade in Quality. Its trailing-12-month gross profit margin of 33.30% is 10% higher than the industry average of 30.28%. Its trailing-12-month net income margin of 10.59% is 74% higher than the 6.09% industry average.
Among the 28 stocks in the in the Airlines industry, UAL is ranked #17, while ACDVF is ranked #2.
Beyond what we’ve stated above, we have also rated both stocks for Stability, Momentum, Growth, Value, and Sentiment. Get all UAL ratings here. Click here to view ACDVF ratings.
The Winner
The travel industry is seeing growth due to increased consumer spending and steady travel demand, benefitting industry players such as UAL and ACDVF.
However, ACDVF’s higher profitability and lower valuation multiples makes it the better buy here.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Airlines industry here.
What To Do Next?
Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:
ACDVF shares were trading at $14.12 per share on Friday morning, down $0.10 (-0.67%). Year-to-date, ACDVF has declined -2.08%, versus a 25.81% rise in the benchmark S&P 500 index during the same period.
About the Author: Nidhi Agarwal
Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.
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