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United bullish bets at 7-year high

Options traders haven’t been this bullish on United Continental Holdings since 2006, spurred by a jump in holiday ticket sales and forecasts for faster earnings growth.

Puts protecting against a 10 per cent decline in the air carrier’s shares cost 1.8 points more than calls betting on a 10 per cent gain, according to six-month data compiled by Bloomberg. The price relationship known as skew slipped to 1.42 points on December 27, the lowest level since September 2006. The shares have surged 24 per cent this year.

United is forecast to increase profit in 2013 and 2014 after declines in the previous two years as the company reduces fuel costs by flying newer, more efficient planes and boosts fee revenue, analysts’ estimates compiled by Bloomberg show. United’s revenue per passenger mile, an industry benchmark, was competitive with peers in December after underperforming since September, according to Raymond James Financial.

“If you look at what airlines could be earning in 2014 and 2015, they’re low multiple stocks and have the potential to expand, especially United,” Don Hodges, founder of Dallas-based Hodges Capital Management, which owns the shares, said in a January 15 phone interview. His firm manages about $1.6 billion. “Airlines have all been performing well, but recently, United has been the strongest.”

The world’s second-largest carrier is scheduled to report quarterly results on January 23.

United reported on January 8 that revenue from each passenger flown a mile rose as much as 12.5 per cent in December from a year ago. That exceeded Raymond James’ estimate for a three per cent increase and Wolfe Research’s five per cent projection.

The stock fell 0.3 per cent to $47.07 at 4 p.m. in New York.

United said in November that it would cut $2 billion in annual spending, with half of the savings coming from a seven per cent reduction in fuel expenses. The company combined with Continental Airlines in 2010 and has struggled since then to control costs that are growing faster for each seat flown a mile than revenue on the same basis.

“Delta and United are the two airlines who are inefficient,” said Hodges, whose Hodges Fund has beaten 99 per cent of its peers in the past year. “Because of that, they have the most to gain by being efficient.”

United shares trade at 11.3 times projected earnings, according to data compiled by Bloomberg. That’s cheaper than the 13.1 multiple for the carriers in the Bloomberg US Airlines Index and 15.6 for the Standard & Poor’s 500 Index.

United will post earnings of 62 cents a share for the fourth quarter, compared with a 58-cent loss a year ago, according to the average of analysts’ estimates compiled by Bloomberg.

Implied volatility, used to gauge the cost of options, for six-month contracts with an exercise price 10 per cent below United’s shares was 44.83, while the measure for calls 10 per cent above the shares was 42.99.

Christen David, a spokeswoman for United, declined to comment on the company’s options trading.

Slower-than-projected economic growth or rising oil prices may drag down United’s shares, according to Walter Todd, who oversees about $950 million as chief investment officer of Greenwood Capital Associates in Greenwood, South Carolina. His firm bought United shares in November.

“They still have a little bit to prove in terms of their ability to operate efficiently relative to their peers,” Todd said.