The stock of airline giant United Continental Holdings (NYSE:UAL) is up around 50% from lows seen last fall, but a share can still be had for less than the cost of checking a bag on one of its flights. The earnings valuation is equally reasonable, and industry conditions are far improved from years past.

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Recent Developments
United recently gave a presentation at a global transportation conference and detailed the airline industry's shift from its previous focus of gaining market share, which lasted for nearly three decades. The industry used to be highly fragmented and competed primarily on price. However, over the past several years, numerous bankruptcies and industry consolidation have helped shift the focus to earnings profits. This has come from a more strategic controlling capacity and adding new revenue streams, such as charging for food on flights, checked luggage and carry-on bags, the last of which even smaller player Spirit Airlines (Nasdaq:SAVE) has started doing.

A better-balanced industry is working out well for United. For all of 2011, it reported $37.1 billion in total revenues and $840 million in profits, or $2.26 per diluted share. Free cash flow was even more impressive at $1.7 billion, or approximately $4.58 per diluted share. First quarter revenues rose 4.8% to $8.6 billion, but net income was negative at $448 million, due in part to higher fuel costs.

United is also in a strong financial position, thanks in part to a trip through bankruptcy that it came out of in 2006. As of the end of the first quarter, cash on the balance sheet stood at $7 billion, or nearly enough to cover long-term debt of roughly $10 billion. As of the end of the first quarter, cash on the balance sheet stood at $7 billion, or nearly enough to cover long-term debt of roughly $10 billion.

SEE: Understanding The Income Statement

Outlook and Valuation
Despite the first quarter loss, analysts still expect full-year 2012 earnings of $3.95 per share. They expect another solid 43.5% jump in 2013 to $5.67 per share. Annual sales growth over the next two years is projected at around 4%, for total revenues above $40 billion by the end of 2013.

United's stock is bumping up against its highs over the last 52 weeks, but still trades at a reasonable forward P/E of about 4.

SEE: 5 Must-Have Metrics For Value Investors

The Bottom Line
Ironically, global economic growth concerns have sent oil prices on a downward trend, and this has served to improve sentiment for airline stocks. Of course, if the business cycle does slow, flight bookings may dip, which would end up hurting earnings. Archrival American Airlines also recently filed for bankruptcy, and talks are that U.S. Airways (NYSE:LCC) might try to acquire it, which would further consolidate the industry and favor the larger players.

SEE: Earning Forecasts: A Primer

Delta (NYSE:DAL) and Southwest Airlines (NYSE:LUV) are two of the other largest domestic players. Delta's stock price has also moved up recently, with Southwest still stuck under $10 per share. The airline industry is still very capital intensive and very sensitive to the business cycle, but industry consolidation has improved the profit prospects for the larger players. At such a low earnings multiple, United is arguably one of the best investments in the space.

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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

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