United Airlines is trying to provide overly rosy certainty in a world where forecasts are “impossible”
United Airlines’ stock has pared most of its post-earnings gain.
United Airlines’ better-than-expected earnings and dual forecast — one for a recession, one for a more benign backdrop — were initially resoundingly cheered by investors, sending shares as much as 5% higher in early trading on Wednesday.
If the economy avoids a downturn, United Airlines thinks its initial full-year guidance of earnings per share between $11.50 and $13.50 is still realistic. But if a recessionary environment comes to pass, management thinks earnings per share will be in a range of $7 to $9.
“The Company’s outlook is dependent on the macro environment which the Company believes is impossible to predict this year with any degree of confidence,” a company filing on its guidance said.
In putting out these dual forecasts, management tried to do investors — and themselves — a great service. Every chart of “policy uncertainty” has made a hockey-stick move higher, and they’re providing some semblance of an anchor for investors during a time of stormy seas, thick fog, and ineffectual compasses.
It’s a gambit aimed at engineering a potential floor for the stock in an increasingly challenging backdrop. If the economic data starts to sour and stock markets respond by falling, but an investor still trusts United’s executive team, they could take out a pencil and say things like, “Well, assuming the low end of the recessionary range of earnings and valuations around nonrecessionary norms, they stock shouldn’t fall any lower than about $48.”
“The goal was to just give investors more information. It’s nontraditional — we’re the first ones that I’ve ever know of that have done something like this — and so far the feedback has been very positive,” CEO John Kirby said in an interview on Bloomberg TV.
So the feedback is positive, but how realistic is this anchor? Based on what’s happened to United’s earnings during the past two recessions, probably not very. But those two downturns included Covid (slamming the brakes on global mobility is famously ungood for airlines) and the financial crisis, which was a severe and prolonged retrenchment in activity relative to history.
What we might be seeing right now, with the stock paring most of its massive post-earnings move, is investors reevaluating whether that glass-half-full view on the glass-half-empty scenario passes the smell test.
