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Analysts Give United Continental Holdings Inc (UAL) Too Much Slack

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United Continental Holdings Inc (NYSE:UAL)United Continental Holdings Inc (NYSE:UAL)— the world’s largest airline, for now — reported second-quarter earnings late last month. The company earned $521 million before special charges last quarter, equivalent to EPS of $1.35. Officially, that beat the average analyst estimate for EPS of $1.29. However, it’s hard to call United’s recent results anything other than disappointing.

Yet airline analysts all too often let United Continental Holdings Inc (NYSE:UAL) off the hook for its underperformance. Over the last year or two, a pattern has emerged where United consistently produces lower profits (or bigger losses) than analysts expected at the beginning of the quarter. However, through a process of gradually lowering expectations through twice-quarterly investor updates, United has managed to keep Wall Street happy and participate in the airline industry’s recent rally. However, United’s weak financial results will eventually haunt the stock; hype and hopes can only get you so far.

A pattern of weakness
JPMorgan analyst Jamie Baker, who is one of the more bearish United analysts, recently pointed out that United’s earnings have declined on a year-over-year basis for nine straight quarters. That makes up nearly all of United Continental’s post-merger history. Indeed, if you look at Q2 of 2010 (before the United-Continental merger), the two carriers combined to produce adjusted net income of $746 million — 43% above last quarter’s total.

United’s declining earnings trend is likely to reverse in the third quarter, but it will still fall far short of the $896 million United and Continental earned on a combined basis in Q3 2010, the last quarter before the two carriers merged. The average analyst estimate for Q3 profit has dropped from $2.24 to $2.03 in the last 30 days.

Based on United Continental Holdings Inc (NYSE:UAL)’s recent investor update, those estimates are likely to continue falling. Unit costs are projected to rise 3%-3.6%, while the company expects unit revenue to increase 3%-5% for the quarter. This should produce a respectable increase from last year’s EPS of $1.35, but not the 50% growth that analysts are currently predicting.

Meanwhile, competitors like US Airways Group, Inc. (NYSE:LCC) and Delta Air Lines, Inc. (NYSE:DAL) have been reporting record earnings results recently and are expected to continue growing earnings in the second half of 2013 and 2014. Delta has an especially promising road map ahead of it, including a $1 billion structural cost reduction initiative that is offsetting normal cost inflation.

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