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After Mixed Earnings, Why Airlines ETF is Flying Higher

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The pure-play aviation ETF U.S. Global Jets ETF (JETS - Free Report) gained about 8.3% in the last one month (as of May 15, 2017) compared with 3.4% returns offered by SPDRÂ S&P 500 ETF (SPY - Free Report) despite mixed earnings results. The industry is in the bottom 29% of the Zacks Industry Rank at the time of writing, giving bearish signals (see all industrial ETFs here).

Let’s delve a little deeper into the earnings picture and find out what is driving this corner higher.

Q1 Results in Detail

Delta Air Lines Inc. (DAL - Free Report) reported almost a month ago with a bottom-line beat and a top-line miss. Operating revenues of $9.148 billion came below the Zacks Consensus Estimate of $9.156 million. Revenues fell marginally from the year-ago figure. The carrier’s earnings (excluding special items) of $0.77 per share beat the Zacks Consensus Estimate of $0.73. Earnings, however, fell over 41% on a year-over-year basis. The company has a Zacks Rank #3 (Hold) and a VGM (Value-Growth-Momentum) score of ‘B’.

United Continental Holdings (UAL - Free Report) posted first-quarter 2017 earnings (on an adjusted basis) of $0.41 per share, beating the Zacks Consensus Estimate by $0.04. The bottom line, however, plunged 66.7% year over year due to higher costs. Operating revenues of $8,420 million were marginally ahead of the Zacks Consensus Estimate of $8,362.5 million. Revenues increased 2.7% on a year-over-year basis. United Continental has a Zacks Rank #3 and a VGM score of ‘B’.

Low cost carrier Southwest Airlines Co. (LUV - Free Report) reported lower-than-expected earnings and revenues in the first quarter. The carrier’s earnings per share (on an adjusted basis) of 61 cents missed the Zacks Consensus Estimate of 62 cents. Earnings also declined 30.68% year over year. Operating revenues of $4,883 million marginally missed the Zacks Consensus Estimate of $4,894.1 million but improved 1.18% year over year. Zacks Rank #3 LUV has a VGM score of ‘A’.

American Airlines Group Inc.’s (AAL - Free Report) first-quarter 2017 earnings (adjusted) of 61 cents per share beat the Zacks Consensus Estimate by 4 cents. Revenues of $9,624 million were 2% higher than the year-ago figure. Quarterly revenues edged past the Zacks Consensus Estimate of $9,621.3 million. Zacks Rank #3 AAL has a VGM score of ‘A’.

Low-cost carrier JetBlue Airways Corporation’s (JBLU - Free Report) first-quarter 2017 earnings (excluding special items) of 25 cents per share beat the Zacks Consensus Estimate by a penny. Quarterly earnings, however, declined 57.63% from the year-ago figure due to higher costs. Operating revenues of $1,604 million fell short of the Zacks Consensus Estimate of $1,617.8 million. Zacks Rank #3 JBLU has a VGM score of ‘A.’

Alaska Air Group (ALK - Free Report) reported mixed results in the first quarter. The carrier’s earnings of $1.05 per share beat the Zacks Consensus Estimate by a penny. Revenues of $1,749 million fell short of the Zacks Consensus Estimate of $1,782.7 million. The top line grew 29.8% year over year. Zacks Rank #3 (Hold) ALK has a VGM score of ‘A.’

Is JETS a Really Buy Candidate?

By now, it is clear that the beat ratios that the corporate strength in the airlines industry is moderate. However, oil prices play a crucial role in the airlines’ cost structure. If oil prices manage to see an uptrend in the coming days on the extension of the OPEC output curb deal, airlines may suffer on profit margins (read: Saudi, Russia Boost Oil Price: Bet on Leveraged ETFs).

However, United Continental Holdings Inc. was backed by one of its major shareholders and American Airlines dropped hints that it is gaining more control over its fares, as per Bloomberg. This was actually what pushed up the fund in recent trading sessions.

If this was not enough, Warren Buffett's Berkshire Hathaway recently indicated that it made sizable investments in American Airlines and Southwest Airlines, benefiting the sector (read: Invest Like Warren Buffett with These ETF Strategies).

Nevertheless, investors having a strong stomach for oil-related risks and overall moderate earnings, may target the airline industry in the ETF form. Otherwise, the backdrop is risky for airlines investing. Below we highlight the fund in detail:

JETS in Focus

The $72.8 million-fund holds over 30 stocks in its portfolio and is concentrated on a few individual securities. United Continental (12.68%), American Airlines (12.39%) and Southwest Airlines (12.22%) are the top three elements in the basket. The product charges 60 bps in fees. JETS has a Zacks ETF Rank #3 with a High risk outlook.

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