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Southwest Airlines (LUV) Q4 Earnings: A Beat in the Cards?

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We expect Dallas-based, Southwest Airlines Co. (LUV - Free Report) to report better-than-expected earnings in the fourth quarter of 2016. The carrier will release its results on Jan 26, before market opens.

In the third quarter, the carrier reported a positive earnings surprise of 5.68%. Low fuel costs boosted the bottom line. A conservative Zacks Consensus Estimate for the third quarter (88 cents per share, which was 4.34% lower than the year-ago figure) also contributed to the earnings beat. Revenues also surpassed expectations.

The Southwest Airlines stock has gained over 19% since the third-quarter earnings beat. The stock has outpaced the Zacks categorized Transportation-Airline industry over the last three months. The stock returned 18% compared with the industry’s gain of 13.5% over the same period.

The optimism regarding the stock ahead of its fourth-quarter earnings release can be gauged by a 3% increase in the Zacks Consensus Estimate over the last month.

Our quantitative model shows that Southwest Airlines is likely to beat earnings because it has the perfect combination of two key ingredients.

Zacks ESP: The Earnings ESP for Southwest Airlines is +1.47% with the Most Accurate estimate exceeding the Zacks Consensus Estimate of 68 cents per share by a penny. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Southwest Airlines carries a Zacks Rank #2 (Buy). Note that stocks with a Zacks Rank #1 (Strong Buy), 2 or 3 (Hold) have a significantly higher chance of beating earnings estimates. 

The combination of Southwest Airlines’ Zacks Rank #2 and a positive ESP makes us reasonably confident of an earnings beat. 

Conversely, the Sell-rated stocks (Zacks Rank #4 or 5) should never be considered going into an earnings announcement.

Southwest Airlines Co. Price and EPS Surprise

 

Southwest Airlines Co. Price and EPS Surprise | Southwest Airlines Co. Quote

What is Driving the Better-than-Expected Earnings?

The carrier has a decent track record with respect to earnings per share. Southwest Airlines missed the Zacks Consensus Estimate in just one of the last four quarters. The average beat is 2%.

Southwest Airlines recently unveiled an improved guidance for operating revenue per available seat miles (RASM) for the fourth quarter of 2016. RASM is now expected to decline in the range of 3% to 4% from the fourth quarter of 2015 compared with the earlier guidance of a decline in the range of 4% to 5%. The improvement in outlook was primarily driven by better close-in yields. We expect Southwest Airlines to come out with a further improved view on unit revenues for the first quarter, just as Delta Air Lines (DAL - Free Report) did on Jan 12.

We are also positive on the company's deal with Global Eagle Entertainment, inked in the third quarter. The commencement of services to the Cuban capital of Havana – its 100th destination, is also a positive.

Moreover, we are impressed by Southwest Airlines’ efforts to reward its shareholders. During the third quarter of 2016, the company returned $312 million to shareholders through buybacks and dividend payments.

Though we are positive on the company’s recent deals with various labor groups ratified in the fourth quarter, labor costs should spike in the quarter due to them. Southwest Airlines expects cost per available seat mile (CASM) – excluding special items and profit sharing – to increase in the band of 4–5% in the final quarter of 2016, which is much more than the 2.6% increase witnessed in the third quarter.

Stocks to Consider

Investors interested in the airline space may consider the following stocks as our model shows they possess the right combination of elements to post an earnings beat this quarter.

American Airlines Group (AAL - Free Report) has an Earnings ESP of +1.12% and a Zacks Rank #2. The company, which will release its fourth-quarter results on Jan 27, has an impressive history with respect to earnings per share. The company beat the Zacks Consensus Estimate in each of the last four quarters with an average positive surprise of 20.48%. You can see the complete list of today’s Zacks #1 Rank stocks here.

JetBlue Airways Corp. (JBLU - Free Report) has a Zacks Rank #3 and an Earnings ESP of +4.17%. The company is scheduled to report fourth-quarter results on Jan 26. The company beat the Zacks Consensus Estimate in three of the last four quarters with an average positive surprise of 6.49%.

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