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Airlines Earnings Mixed: ETF Appears a Contrarian Bet

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It’s been more than two weeks since Delta Air Lines Inc. (DAL - Free Report)  kick started the fourth-quarter earnings season for the airline space. Overall, the season has been mixed for the industry. The sector still has to traverse a long way before it can reach the pre-pandemic level.

However, the pureplay airlines ETF U.S. Global Jets ETF (JETS - Free Report) was up 4.8% past week, flat in the past month and up 29.7% in the past three-month period. In fact, the fund beat the S&P 500 (up 13.7%) in the past three-month period (simply put, since when the vaccine news hit the market) (read: Sector ETFs to Gain the Most on COVID-19 Vaccine Rollout).

This makes JETS a great bet for vaccine rollout and economic optimism. Still, we need to pay attention to the earnings picture of the industry. Lets’ delve a little deeper.

Inside the Headlines

Delta Air Lines incurred a loss (excluding $1.34 from non-recurring items) of $2.53 per share in the fourth quarter of 2020, wider than the Zacks Consensus Estimate of a loss of $2.43. With coronavirus cases noticing a spike again in the United States, passenger revenues continued to be weak in the December quarter, witnessing a 74% plunge year over year to $2,698 million. Although cargo revenues increased 10% to $204 million and revenues from other sources climbed 6% to $1,071 million, total revenues in the December quarter tanked 65% to $3,973 million. Revenues, however, topped the Zacks Consensus Estimate of $3,754.5 million.

United Airlines (UAL - Free Report) incurred a loss (excluding 6 cents from non-recurring items) of $7 per share in the fourth quarter of 2020, wider than the Zacks Consensus Estimate of a loss of $6.56. Operating revenues of $3,412 million lagged the Zacks Consensus Estimate of $3,420.4 million. The top line plunged 68.7% year over year due to a 75.7% drop in passenger revenues, which came in at $2,410 million in the reported quarter. However, cargo revenues surged 77.2% year over year to $560 million. Meanwhile, revenues from other sources declined 30.8% to $442 million.

American Airlines Group Inc.’s (AAL - Free Report)  incurred a loss (excluding 5 cents from non-recurring items) of $3.86 per share comparing favorably with the Zacks Consensus Estimate of a loss of $3.92. Operating revenues of $4,027 million slumped 64.4% year over year but surpassed the Zacks Consensus Estimate of $3,859.2 million.

Low-cost carrier Southwest Airlines Co. (LUV - Free Report)  incurred a loss of $1.29 per share (excluding 25 cents from non-recurring items) in the fourth quarter of 2020, narrower than the Zacks Consensus Estimate of a loss of $1.69. In the year-ago period, the company had reported earnings of 98 cents per share. Meanwhile, operating revenues of $2,013 million lagged the Zacks Consensus Estimate of $2,117.5 million. The top line declined 64.9% year over year, with passenger revenues accounting for a bulk (82.6%) of the top line, sliding 68.7%.

JetBlue Airways Corporation’s (JBLU - Free Report)  incurred a fourth-quarter 2020 loss (excluding 19 cents from non-recurring items) of $1.53 per share, comparing favorably with the Zacks Consensus Estimate of a loss of $1.72. Operating revenues of $661 million plunged 67.4% year over year due to the 68.9% decrease in passenger revenues, which accounted for a bulk (91.7%) of the top line. Revenues from other sources declined 33.8% to $55 million. The top line, however, surpassed the Zacks Consensus Estimate of $617.8 million.

Alaska Air Group (ALK - Free Report) , the parent company of Alaska Airlines, incurred a loss of $2.55 per share (excluding 92 cents from non-recurring items) in the fourth quarter of 2020, narrower than the Zacks Consensus Estimate of a loss of $2.91. Revenues at Alaska Air came in at $808 million, surpassing the Zacks Consensus Estimate of $786.6 million. The top line, however, declined 63.7% year over year. Passenger revenues — contributing 81.3% to the top line — were down 68% on a year-over-year basis to $658 million.

ETF in Focus

The $2.99-billion-fund holds more than 30 stocks in its portfolio and is concentrated on a few individual securities. American Airlines (10.30%), Southwest Airlines (10.17%), Delta Airlines (9.70%) and United Continental (8.88%) take the first four positions in the fund.

Alaska Air and JetBlue hold the sixth and eighth positions in the fund with a 4.26% and 4.02% weight, respectively. The product charges 60 bps in fees (see all industrials ETFs).

Bottom Line

While the earnings picture is still gloomy, some companies beat on top-line estimates. This shows a feeble hope for recovery in the coming days. If there is a steady improvement in the coronavirus scenario globally, one can surely see a jump in this otherwise-undervalued product JETS.

Hence, JETS appears to be contrarian bet. Notably, contrarian betting is an investment strategy that leads you to place bets on the undervalued products that often emerge as winners. This happens because extreme pessimism about an investment sometimes underestimates its prospects for success.

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