American Airlines Group Inc. (AAL - Free Report) is slated to release third-quarter 2016 results on Oct 20, before the market opens.
In the second quarter, the carrier had delivered a positive earnings surprise of 7.27%. Results were aided by low fuel costs. This is because fuel accounts for a major chunk of an airline's operating expenses. Total operating expenses declined significantly to $8.6 billion on the back of a 24.9% reduction in fuel costs.
We expect the Fort Worth, TX- based carrier to deliver better-than-expected earnings in the third quarter as well driven by its strong fundamentals. The optimism regarding the stock ahead of its third-quarter earnings release can be gauged by the 7.8% increase in the Zacks Consensus Estimate over the last month.
Our quantitative model shows that American Airlines is likely to beat earnings because it has the perfect combination of two key ingredients.
Zacks ESP: The Earnings ESP for American Airlines is +3.01% with the Most Accurate estimate exceeding the Zacks Consensus Estimate of $1.66 per share by 5 cents.
Zacks Rank: American Airlines carries a Zacks Rank #3 (Hold). Note that stocks with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 have a significantly higher chance of beating earnings estimates. Conversely, Sell-rated stocks (Zacks Rank #4 or 5) should never be considered going into an earnings announcement.
The combination of American Airlines’ Zacks Rank #3 and a positive ESP makes us reasonably confident of an earnings beat.
What is Driving the Better-than-Expected Earnings?
The carrier has an impressive track record with respect to earnings per share. American Airlines outpaced the Zacks Consensus Estimate in each of the last four quarters with an average beat of 4.27%.
The carrier has seen quite a few positive developments in the third quarter. The final approval granted by the U.S. Department of Transportation to eight carriers, including American Airlines, to initiate commercial flights to Havana is a major positive. The carrier has gained approval to operate 35 direct flights a week and has already commenced its Cuban operations.
We are also encouraged by the bullish presentation of its newly appointed president, Robert Isom, at the 9th Annual Global Transportation Conference. Isom emphasized on the carrier’s product segmentation strategy for effective branding, selling and pricing. We believe that more segmentation would boost the company’s results.
We appreciate the company’s efforts to reward shareholders through share buybacks and dividend payments. The carrier’s efforts to modernize its fleet – introducing new aircraft and removing old ones from its fleet – also impress.
We are also optimistic about the improved view issued by the carrier with respect to total revenue per available seat mile (RASM: a key measure of unit revenue) for the third quarter. American Airlines now expects third-quarter RASM to decline in the band of approximately 2–3% (the earlier guidance had indicated a decline in the band of 3–5%) on a year-over-year basis. The company estimates pre-tax margin of 13–15% for the third quarter as against the previous guidance of 12–14%.
Other Stocks to Consider
Here are a few stocks in the transportation sector that you may want to consider as our model shows that these have the right combination of elements for an earnings beat this quarter:
Student Transportation Inc. has an Earnings ESP of over +11.11% and a Zacks Rank #2. The company, which beat the Zacks Consensus Estimate in three of the last four quarters, is expected to report third-quarter earnings on Nov 3. You can see the complete list of today’s Zacks #1 Rank stocks here.
Genesee & Wyoming Inc. (GWR - Free Report) has an Earnings ESP of +4.26% and a Zacks Rank #3. The company, which will release its third-quarter results on Nov 1, has an impressive history with respect to earnings per share, having outpaced the Zacks Consensus Estimate in each of the last four quarters by an average of 5.71%.
Alaska Air Group (ALK - Free Report) has an Earnings ESP of +0.49% and carries a Zacks Rank #3. The carrier, which has seen the Zacks Consensus Estimate for the third quarter increase 3 cents to $2.04 per share over the last month, is scheduled to unveil its quarterly results on Oct 20.
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