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Earnings ESP

Domestic disarray and global volatility were enough troubles for the market, and the debt ceiling issue added to the ordeal. But the temporary extension of the Federal Government’s borrowing capacity has put a stopple to the potential default on U.S. debt obligations and shutdown threats.    
 
Still concerns on the growth aspect of the world’s largest economy persist and the resulting market uncertainty may cast its shadow on the Airline industry, as its performance has historically been sensitive to market conditions.
 
The 2008 recession and fuel price volatility resulted in a downturn in the Airline industry and the full recovery is still due. However, given the temporary resolution of the debt ceiling issue, the outlook for the industry looks bright for the balance of the year. Particularly, a modest rise in demand and cost-control measures will help air carriers perform better in the near term. 
 
The International Air Transport Association (IATA) projects overall airline profits of $11.7 billion for 2013, with 3.12 billion passengers in total.  As a result, North American carriers are expected to generate $4.9 billion in profits in 2013, higher than $2.3 billion earned last year. Based on these facts we suggest certain stocks in the sector that offer value over the near term.
 
Given the positive sentiment, it might be a good idea to bet on a handful of airline stocks that are poised to beat earnings estimates this quarter.
 
How to Pick the Best?
 
An easy way to narrow down the list of choices is to take a look at stocks with solid Zacks Rank and a favorable Zacks Earnings ESP.
 
Earnings ESP is our proprietary methodology for determining which stocks have the best chance to surprise with their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus.
 
The combination of a favorable Zacks Rank – Zacks Rank #1 (Strong Buy) or 2 (Buy) or 3 (Hold) – and a positive earnings ESP is usually a harbinger of earnings beat. Our research shows that for stocks with this combination, the chance of positive earnings surprise is as high as 70%.
 
For investors seeking to benefit by applying this strategy to their portfolio, we have chosen three airline stocks that are scheduled to release earnings next week and match these criteria.
 
US Airways Group, Inc. : Based in Arizona, US Airways Group represents the fifth largest airline in the country on domestic revenue passenger miles and available seat miles. The carrier offers scheduled passenger service in the U.S. and international markets like Canada, Mexico, Europe, the Middle East, the Caribbean, and Central and South America. As of Jun 30, 2013, the carrier operated 346 mainline jets, 238 regional jets and 43 turboprops.
 
The Zacks Consensus Estimate for US Airways Group is pegged at $1.07 with year over year growth expectation of 9.5%. The company has registered an average earnings surprise of 20.85% over the trailing twelve months. 
 
US Airways Group currently carries a Zacks Rank #2 (Buy) and has an Earnings ESP of +6.54%. The company is slated to report its third quarter results on Oct 23.
 
Alaska Air Group, Inc. (ALK - Snapshot Report): Passenger and cargo airline, Alaska Air Group, which serves 95 cities via Alaska Airlines and Horizon Air and regional airline partners has network across Alaska, the Lower 48, Hawaii, Canada and Mexico.  As of Jun 30, 2013, the company’s operating fleet consisted of 176 aircraft that included 128 Boeing 737 jet aircraft and 48 Bombardier Q400 turboprop aircraft.
 
Currently, the Zacks Consensus Estimate for Alaska Air Group is $2.10 with growth expectation of 0.6% over the prior-year quarter. The company has registered an average earnings surprise of 3.43% over the trailing twelve months. 
 
Alaska Air Group’s Earnings ESP is +1.91% and it carries a Zacks Rank #2 (Buy). The company is scheduled to report its third quarter results before the opening bell on Oct 24.
 
Southwest Airlines Co. (LUV - Analyst Report): Dallas-based Southwest Airlines provides low cost passenger air transportation services in the U.S. It primarily provides short-haul, high frequency, and point-to-point airline services covering many secondary or downtown airports such as Dallas Love Field, Houston Hobby, Chicago Midway, Baltimore/Washington International, Burbank, Manchester, Oakland and San Jose. In May 2011, Southwest completed the acquisition of AirTran Holdings, which now operates as a wholly owned subsidiary under the name AirTran Airways. As of Jun 30, 2013, Southwest operated 696 Boeing aircraft and served 97 cities along with AirTran.
 
The Zacks Consensus Estimates for Southwest Airlines’ third quarter earnings is pegged at 31 cents, representing a robust 141.5% year over year growth.
 
The company presently carries a Zacks Rank #3 (Hold) and has an Earnings ESP of +9.68%. Southwest Airlines is set to report its third quarter results on Oct 24, before the opening bell.
 
Moving Forward
 
A precarious economy as well as lingering concerns over debt ceiling and budget cuts may not look ideal for a bullish market and even discourage big bets. Nevertheless, if the Airline sector manages to withstand economic weakness and endure the struggle for survival, investors could safely rely on its outperformers backed by their growth potential.
 
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