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Will Airline ETF Surge on Earnings or Dive on Trump?

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The pure-play aviation ETF U.S. Global Jets ETF (JETS) gained about 22.2% in the last one year (as of January 30, 2017). The industry is in the top 14% of the Zacks Industry Rank at the time of writing, giving bullish signals to the entire industry (see all industrial ETFs here).

However, global airlines may fall on hard times with an embargo on travels from seven Muslim-dominated nations as per President Donald Trump’s executive order. The order is likely to hurt airlines both on a short-term and a long-term basis.

The short-term impact will scale up costs as airlines now need to refund for their customers’ planned travel to the U.S. or accommodate them in other ways. And over the long term, airlines will likely lose a customer base (read: Welcome Trump Era with These ETFs).

Against such a backdrop, let’s take a look at some of the key fourth-quarter 2016 earnings in the industry and see if the fund can attain further altitude (read: 6 ETFs Breezing Past Dow Jones This Quarter):

Q4 Results in Detail

Delta Air Lines Inc. DAL kicked off the fourth-quarter earnings season in the airline space with a bottom-line meet and a top-line beat.  Operating revenues of $9.458 billion came ahead of the Zacks Consensus Estimate by 1.1%. Revenues fell marginally from the year-ago figure. The carrier’s earnings (excluding special items) of $0.82 per share were in line with the Zacks Consensus Estimate. Earnings, however, fell over 30% on a year-over-year basis. The company has a Zacks Rank #3 (Hold) and a VGM (Value-Growth-Momentum) score of ‘A’.

United Continental Holdings UAL posted an earnings beat in the fourth quarter. Earnings (on an adjusted basis) of $1.78 per share beat the Zacks Consensus Estimate by $0.13. Earnings, however, declined 29.9% on a year-over-year basis owing to higher costs. Operating revenues of $9.052 billion, however, fell short of the Zacks Consensus Estimate of $9.059 billion. United Continental has a Zacks Rank #1 (Strong Buy) and a VGM score of ‘A’.

Low cost carrier Southwest Airlines Co. LUV came up with a beat on both lines for the fourth quarter. The carrier’s earnings (on an adjusted basis) of $0.74 per share beat the Zacks Consensus Estimate of $0.69. Revenues of $5.076 billion edged past the Zacks Consensus Estimate of $5.025 billion and increased 2% year over year. Zacks Rank #2 (Buy) LUV has a VGM score of ‘B’. Post earnings release, the stock gained about 9% on January 26.

American Airlines Group Inc.’s AAL fourth quarter 2016 earnings (adjusted) of $0.92 per share were in line with the Zacks Consensus Estimate. Quarterly earnings decreased significantly year over year. Higher costs hurt the bottom line. Revenues of $9.79 billion were 1.7% above the year-ago figure and edged past the Zacks Consensus Estimate of $9.77 billion. Zacks Rank #2 AAL has a VGM score of ‘A’.

Low-cost carrier JetBlue Airways Corporation’s (JBLU - Free Report) fourth-quarter earnings (excluding special items) of $0.50 per share beat the Zacks Consensus Estimate by a penny. However, earnings dropped 10.4% from the year-ago figure due to higher costs. Operating revenues of $1.641 billion came in line with the Zacks Consensus Estimate. Revenues improved 2.9% from the year-ago figure. The top line benefited primarily from a 5.4% increase in other revenues. Passenger revenues grew 2.7%. Zacks Rank #4 (Sell) JBLU has a VGM score of ‘A.’

Should You Buy JETS?

By now, one must have understood from the beat ratios that the corporate strength in the airlines industry is moderate and recovering. Plus, most of the airlines are restraining capacity growth which should improve unit revenues.  

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 OPEC output curb deal, airlines may suffer on profit margins (read: Oil Service ETFs Dip on Mixed Earnings: A Good Entry Point?).

Nevertheless, investors having a strong stomach for Trump and oil-related risks, faith in the compelling valuation of airline stocks and seeking to play the sector on decent earnings, may target it in the ETF form. Otherwise, the backdrop is risky for airlines investing. Below we highlight the fund in detail:

JETS in Focus

The $65.7 million-fund holds over 33 stocks in its portfolio and is concentrated on a few individual securities. Southwest Airlines (12.75%), United Continental (12.38%), Delta Airlines (11.81%) and American Airlines (11.69%) are the top four elements in the basket. JetBlue holds the ninth position in the fund with 3.53% weight.

The product charges 60 bps in fees. The fund lost about 2.7% in the last 10 trading sessions (as of January 30, 2017) which saw the peak of airlines earnings’ releases. The fund has a Zacks ETF Rank #4 with a High risk outlook.

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