United's Low Valuation Faces a Test From Cash Flow and Debt

United Airlines’ low valuation comes with risks tied to its cash flow, debt and thin profit margins, according to an Insider Monkey analysis. The airline reported $322 million in free cash flow in the second quarter, against $1.6 billion in operating cash flow.

The analysis cited United’s forward price-to-earnings ratio at about 7.9 times, according to GuruFocus, while noting estimates differ by provider. It said airlines often trade at discounts because of cyclical demand, fuel-cost swings and heavy capital needs.

United reported $17.67 billion in operating revenue, up 16% year over year. Its operating margin was 6.95% and its net profit margin was 5.56%. Trailing adjusted EBITDA fell to about $7.4 billion from $8.5 billion a year earlier.

Debt and related financial liabilities stood at $26.5 billion at quarter-end. The analysis described United as a value play with significant risks and said more cautious investors may want to see improvement in free cash flow and the debt burden.

The company is also shifting more cabin space toward premium seating. Its new Boeing 787-9 Dreamliners have 222 seats, including about 45% premium seating, compared with 257 seats and 27% premium seating in the older configuration.