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Southwest Airlines (LUV) Q2 Earnings: Will it Disappoint?

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Southwest Airlines Co. (LUV - Free Report) has been in troubled waters of late, mainly due to the Apr 17 flight 1380 incident, which resulted in a decline in bookings. Apart from the unfortunate mid-air incident, which claimed one life and injured many, high fuel prices remain a major concern. Such headwinds have resulted in the stock losing 11.2% of its value in the April-June period (second-quarter 2018).

Q2 Price Performance

 

 

We remind investors that this Dallas-based low-cost carrier had failed to secure an earnings beat in the first quarter of 2018. Moreover, sales declined on a year-over-year basis. Southwest is unlikely to perform any better in the soon-to-be-reported quarter as well due to the above-mentioned headwinds. In fact, the stock might lose further value on dismal second-quarter results, which will be out on Jul 26.

The negative sentiment surrounding the stock can be made out from the fact that the Zacks Consensus Estimate for second-quarter earnings has been revised downward to the tune of 7.4% over the last 60 days.

Generally, decreasing earnings estimates increase the chances of a beat. However, our quantitative model does not indicate an earnings beat this time. Here’s why:

Southwest Airlines does not have the right combination of the two key ingredients – a positive Earnings ESP and a Zacks Rank #3 (Hold) or better – for increasing the odds of a positive earnings surprise.

Earnings ESP:  Southwest Airlines has an Earnings ESP of -0.51%. This is because the Most Accurate Estimate of $1.24 is lower than the Zacks Consensus Estimate by a penny. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Southwest Airlines Co. Price and EPS Surprise

 

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

Zacks Rank: Southwest Airlines carries a Zacks Rank #3, but this alone isn’t enough to increase the chance of an earnings beat.

Let’s delve deep to unearth the factors likely to influence second-quarter results:

Similar to the last reported quarter, high fuel costs are likely to act as the key dampener to Southwest Airlines’ earnings in the second quarter. We note that oil prices increased 14% in the April-June period. The Zacks Consensus Estimate for second-quarter average fuel price stands at $2.22 per gallon, higher than the $2.09 reported in the first quarter of 2018. Additionally, expenses on the labor front are expected to limit bottom-line growth.

Also, the top line is likely to suffer due to decrease in bookings as the mid-air engine explosion in April adversely impacted travel demand at Southwest Airlines. In June, the company was sued by a group of eight passengers of the ill-fated flight 1380. Notably, the lawsuit accused the carrier of negligence in providing proper care to its passengers to the point of even risking their lives. An update on the same is expected on the second-quarter conference call.

Furthermore, operating revenue per available seat mile is expected to decline around 3% year over year. The Zacks Consensus Estimate for second-quarter passenger unit revenues is pegged at 12.92 cents, lower than 13.03 cents a year-ago.

However, the new tax law is a huge positive for the company. The enormous tax savings might boost the bottom line in the quarter.

Key Picks

Investors interested in the broader Transportation sector may consider stocks like Expeditors International of Washington, Inc. (EXPD - Free Report) , United Parcel Service, Inc. (UPS - Free Report) and Norfolk Southern Corporation (NSC - Free Report)   as these possess the right combination of elements to deliver an earnings beat this reporting cycle.

Expeditors has an Earnings ESP of +1.54% and a Zacks Rank #2 (Buy). The company will report second-quarter earnings on Aug 7. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

UPS has an Earnings ESP of +0.62% and a Zacks Rank of 2. The company will report second-quarter earnings on Jul 25.

Norfolk Southern is also a #2 Ranked stock and has an Earnings ESP of +0.36%. The company will announce second-quarter financial numbers on Jul 25.

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