Insider Monkey tracks insider purchases because they are statistically associated with higher returns. What we especially like to see is consensus insider buying– multiple insiders at the same company buying in. This is because while company insiders might have many reasons to sell stock, there is really only one reason to buy: they are so confident in the company’s prospects that they ignore the benefits of diversification and tie their wealth even more tightly to the same company which is responsible for their income. And this consensus of insider buying is what we have just seen this month at United Continental Holdings Inc. (NYSE:UAL): five company officers each reported direct acquisitions of 13,500 shares at prices generally between $18 and $18.30, and CEO Jeffery Smisek bought 55,600 shares at an average price of $18.00. Seeing how earlier this month the CFO of Delta (NYSE:DAL) made a large insider buy as well, we think we can conclude that the remarkably low earnings multiples that the market is assigning to many major airlines are undervaluing the stocks.
Partly due to poor investor sentiment towards airlines- United, as United Airlines, exited bankruptcy less than ten years ago- these multiples are low indeed. United Continental Holdings Inc. trades at 16 times trailing earnings, but once expected earnings growth is accounted for the forward P/E multiple is 4 and the five-year PEG ratio is only 0.2. The company doesn’t have to meet these projections in order to prove a good value, it merely has to come close. Given the current market capitalization, the EV/EBITDA multiple is only 3.2x, which is small for such a leading transportation company. In its 10-Q for the second quarter of 2012, United Continental Holdings Inc. (NYSE:UAL) reported revenue numbers up 2% for the quarter and 4% for the first half of the year. However, operating income fell due to higher expenses (primarily fuel costs) as did earnings. Revenue growth was led by growth in Pacific operations, though domestic revenue rose as well. While the company is at risk from further increases in fuel prices, Wall Street analysts are aware of this factor. As such, prices would have to rise considerably more than the sell-side estimates in order for earnings to depart so considerably from their projections that the stock ends up being a poor value.
United Continental Holdings Inc. has big hedge fund players who agreed that the stock was a buy at the end of the first quarter. Billionaire David Tepper’s Appaloosa Management moved heavily into the stock, increasing its position to 8 million shares (find more of David Tepper’s favorite stocks). GMT Capital, managed by Thomas Claugus, also significantly increased its holdings to 9.9 million shares (see other stocks in the fund’s portfolio) and Ken Heebner’s Capital Growth Management had a large position as well. Since the end of March the stock has fallen 15%.
We’ve already discussed the insider buy at Delta, which like United Continental trades at low multiples- a trailing P/E of 8, a forward P/E of 3, and a five-year PEG ratio of 0.1. As we’ve mentioned, the fact that both of these companies are seeing insider buying indicates to us that they are both undervalued. In addition, US Airways (NYSE:LCC) is trading at only four times trailing earnings and three times forward estimates; we think this company, along with the other major airlines in the industry, is a value stock and that the insider activity at Delta and United should be taken as bullish for it as well. Other airlines share United Continental’s exposure to fuel prices as well as to macroeconomic activity. However, with these insider buys joined with the very low valuation multiples we are getting to the point where we recommend that investors buy into these major airlines, as hard as it may be to do so. Picking one is hard, but if we had to at this time we would choose United Continental Holdings Inc. (NYSE:UAL) given the broad consensus of company insiders, just in case there is a company-specific factor in the mix as well as industry factors.
