United drops as CEO acknowledges need to dig out of competitive 'hole'

Shares of United Continental (UAL) fell sharply in afternoon trading after fourth quarter guidance disappointed investors. On an earnings call discussing the current quarter and forecast, CEO Oscar Munoz said "We have dug ourselves in a hole from a competitive perspective." EARNINGS AND GUIDANCE: After the market close on Wednesday, United reported third quarter adjusted earnings per share of $2.22 on a revenue of $9.9B, beating analysts' estimates of $2.12 and $9.87B, respectively. The company reported Q3 passenger revenue per available seat mile down 3.7% and consolidated unit cost per available seat mile increased 3% compared to 3Q16 due largely to higher fuel and labor expense. Consolidated CASM, excluding special charges, increased 2.6% year-over-year, driven mainly by higher labor expense. United forecast Q4 PRASM down 1%-3% and consolidated capacity growth at about 3.5% year-over-year and CASM, excluding fuel and expenses up 2.5%-3.5%. Adjusted pre-tax margin for Q4 is expected to be up 3%-5%. The carrier also predicted fiscal year 2017 consolidated capacity growth of roughly 3.5% and a CASM excluding fuel and expense up 3.3%-3.5%. Commenting on the weak guidance, CEO Oscar Munoz told analysts and investors on a conference call that "We have dug ourselves in a hole from a competitive perspective." WHAT'S NOTABLE: United peer Delta Airlines (DAL) reported better than expected Q3 earnings on October 11, forecasting Q4 passenger unit revenue up 2%-4%, normalized CASM-Ex, including profit sharing, up 4%-5% and system capacity up about 2%. The company said it does expect continued pressure on margins as unit revenue momentum reaches the rise in fuel prices. ANALYST REACTION: In a post-earnings analyst note, Stephens' Jack Atkins said he views the company's Q4 guidance as "mixed." He said the company's expected PRASM decline is better-than-expected, but noted that the CASM increase continues to weigh on pre-tax margins regardless of increased capacity growth, which will widen the gap between United and its peers. He reiterated an Equal Weight rating on the stock. Barclays analyst Brandon Oglenski said the company's margin guidance was "less than inspiring" and that United's headwinds are "largely company-specific" and a result of strategy. The analyst said United's performance has trailed its peers following the company's decision to increase capacity at a pace greater than demand, which will continue into Q4. He has an Overweight rating and $80 price target on the name. Cowen analyst Helane Becker wrote on Thursday that United's unit revenue forecast shows that prices are improving, but the company's forecast is not as optimistic as peer Delta and may not be as optimistic as American (AAL) when it reports next week. She said that United's PRASM outlook is "mostly in line" with her estimates, adding that Q4 estimates may decrease due to higher costs. She said she views the company's cost guidance as "disappointing" but said it is due to costs and not the weakened fare environment. She has a Market Perform rating and a $70 price target on the stock. OTHERS TO WATCH: Publicly traded companies in the space trading lower this afternoon include Delta, American Airlines, JetBlue (JBLU) and Southwest (LUV). PRICE ACTION: United fell about 10% to $61.20 in afternoon trading. Year-to-date, shares are down about 16%.