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Will American Airlines (AAL) Deliver a Beat in Q1 Earnings?

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American Airlines Group (AAL - Free Report) is scheduled to unveil first-quarter 2017 results on Apr 27, before the market opens.

In the fourth quarter, the carrier had reported earnings in line with the Zacks Consensus Estimate. Quarterly earnings, however, decreased significantly year over year. Higher costs hurt the bottom line. Revenues of $9,789 million were 1.7% above the year-ago figure and edged past the Zacks Consensus Estimate of $9,765.5 million.

Nonetheless, things might be looking up for the company this time. In fact, the optimism regarding the stock before the first-quarter earnings release can be gauged by 12.2% increase in the Zacks Consensus Estimate over the last month.

Notably, American Airlines has an impressive history with respect to earnings per share. It surpassed the Zacks Consensus Estimate in three of the last four quarters with an average beat of 20%. Moving ahead, we expect the company to keep up the impressive trend and top the Zacks Consensus Estimate for the first quarter of 2017. Our quantitative model too shows that the company is likely to beat earnings because it has the perfect combination of two key ingredients.

Zacks ESP: The Earnings ESP for American Airlines is +3.64% with the Most Accurate estimate exceeding the Zacks Consensus Estimate of 55 cents per share by 2 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: American Airlines carries a Zacks Rank #3 (Hold). Note that stocks with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) have a significantly higher chance of beating earnings estimates. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Conversely, we caution you against the sell-rated stocks (Zacks Rank #4 or 5), which should never be considered while going into an earnings announcement.

The combination of American Airlines’ favorable Zacks Rank and a positive ESP makes us reasonably confident of earnings beat.

What is Driving the Better-than-Expected Earnings?

American Airlines recently unveiled a bullish guidance for the first-quarter total revenue per available seat mile (TRASM: a key measure of unit revenues). The carrier now expects the metric to grow in the range of 2–4%, on a year-over-year basis  in the to-be-reported quarter. In fact, the company’s current view represents a marked improvement from the guidance issued last month, when it expected the metric in the band of 1.5–3.5%. Also, it projects pre-tax margin, excluding special items, in the range of 4–6%, which is an increase from the original 3–5%. This raised guidance is primarily based on higher yields. Going forward, we anticipate American Airlines to come out with an improved view on unit revenues for the second quarter, like Delta Air Lines (DAL - Free Report) did on Apr 12.

However, the bottom line is likely to be impacted by higher costs due to the recent labor deals inked by the company. Cost per available seat mile (CASM: excluding fuel and special items) is anticipated to increase approximately 8% in the first quarter primarily due to higher labor costs. Average fuel cost per gallon (mainline) is projected in the band of $1.67 to $1.72 per gallon.

But the company’s efforts to reward shareholders through share buybacks and dividend payments seem to be impressive. American Airlines returned $606 million to its shareholders through the payment of $52 million in dividends and buyback of shares worth $554 million in the fourth quarter. The carrier also approved a new $2 billion buyback program, which is scheduled to expire on Dec 31, 2018. We expect a commentary on the issue on the first quarter conference call. In addition, the company’s efforts to modernize its fleet raise optimism in the stock.

Furthermore, it should be noted that American Airlines is trying hard to expand. To this end, it purchased a minority stake in China Southern Airlines (ZNH - Free Report) in the first quarter.

Another Stock to Consider

Investors interested in the broader transportation space may also consider Norfolk Southern Corporation (NSC - Free Report) as our model shows it possesses the right combination of elements to post an earnings beat in the first quarter.

Norfolk Southern has an Earnings ESP of +0.74% and a Zacks Rank #3. The company will report first-quarter 2017 results on Apr 26.

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