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.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

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.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

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

Related Articles
  1. Fundamental Analysis

    5 Must-Have Metrics For Value Investors

    Focusing on certain fundamental metrics is the best way for value investors to cash in gains. Here are the most important metrics to know.
  2. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  3. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  4. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  5. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  6. Stock Analysis

    The Top 5 Micro Cap Alternative Energy Stocks for 2016 (AMSC, SLTD)

    Follow a cautious approach when purchasing micro-cap stocks in the alternative energy sector. Learn about five alternative energy micro-caps worth considering.
  7. Stock Analysis

    Analyzing Porter's Five Forces on Under Armour (UA)

    Learn about Under Armour and how it differentiates itself in the competitive athletic apparel industry in light of the Porter's Five Forces Model.
  8. Stock Analysis

    The Biggest Risks of Investing in Qualcomm Stock (QCOM, BRCM)

    Understand the long-term fundamental risks related to investing in Qualcomm stock, and how financial ratios also play into the investment consideration.
  9. Stock Analysis

    The Biggest Risks of Investing in Johnson & Johnson Stock (JNJ)

    Learn the largest risks to investing in Johnson & Johnson through fundamental analysis and other potential risks. Also discover how JNJ compares to its peers.
  10. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  1. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  2. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  3. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>
  4. How do you calculate working capital?

    Working capital represents the difference between a firm’s current assets and current liabilities. The challenge can be determining ... Read Full Answer >>
  5. What is the formula for calculating the current ratio?

    The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability ... Read Full Answer >>
  6. What is the formula for calculating earnings per share (EPS)?

    Earnings per share (EPS) is the portion of a company’s profit that is allocated to each outstanding share of common stock, ... Read Full Answer >>
Trading Center