The Q2 earnings season is round the corner as far as stocks in the airline space are concerned. The Atlanta, GA-based airline behemoth Delta Air Lines (DAL - Free Report) will kick off the earnings season for airline players on Jul 13.
On the back of multiple tailwinds, stocks in the space are expected to perform well in this earnings season. In fact, the entire transportation sector of which airlines are a part, is projected to come out with flying colors in Q2.
The bright picture is corroborated by our latest Earnings Trends report. According to the report, the top and bottom lines for this key sector (one of the 16 Zacks sectors) are expected to expand 8.9% and 3%, respectively, in Q2 on a year-over-year basis. In fact, the readings compare favorably to the figures in Q1 where transportation earnings contracted 17.8%, while revenues grew at 6.9%.
As the airline stocks are back in favor despite some hiccups, they are largely responsible for the bright projection for the broader sector. The optimism surrounding airlines is well reflected by the fact that the Zacks categorized Transportation-Airline industry has handily outperformed the S&P 500 Index during the April - June timeframe. While the S&P 500 Index has gained 3.3%, the industry added 10.9% in Q2.
Why the Surge?
Issues related to unit revenues – a measure of sales relative to capacity for a carrier – had negatively impacted airline companies in the recent past. However, the revenue environment has improved as of late. This is reflected in the bullish Q2 unit revenue projections from the likes of American Airlines Group (AAL - Free Report) , JetBlue Airways Corporation (JBLU - Free Report) and Delta.
Moreover, airline companies remain in excellent financial health, which has allowed them to indulge in employee-friendly (profit sharing) and investor-friendly activities (dividend payments/buybacks). For example, the likes of Delta and Southwest Airlines (LUV - Free Report) hiked their dividend pay-outs during Q2. Also, airlines are constantly making investments to modernize their fleet and improve the flying experience of passengers, courtesy their solid balance sheets.
Additionally, oil prices were down approximately 9% in the April - June period. In fact, by Jun 21, crude had slumped in excess of 20% from its highs of $55 a barrel, touched in late February this year. In fact, lower oil prices mean good news for companies in the airline space as fuel costs account for a significant chunk of their expenditures.
Furthermore, the optimism surrounding airline stocks has not gone unnoticed by Warren Buffet; the Oracle of Omaha increased his stakes in American Airlines and Southwest Airlines in the first quarter of 2017 by 8% and 10%, respectively. The data is according to a regulatory filing by Buffett’s Berkshire Hathaway. The interest in airline stocks shown by one of the most revered investors of all time certainly also bodes well for the space.
Zacks Industry Rank Highlights the Favorable Scenario
The positive developments are reflected by the bullish Zacks Industry Rank of 9 carried by the 22-member Transportation- Airline industry. Also 50% of the stocks in the space are Buy- ranked.
Notably, the favorable rank places the industry in the top 4% of the 250+ groups. The positioning indicates a positive outlook. In fact, our back-testing shows that the top 50% of the Zacks ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
Given the favorable backdrop, it is very much likely that airline stocks will have a strong showing in their Q2 results. Naturally, it is a prudent idea to add such stocks to one’s portfolio for handsome returns.
How to Make the Right Choice?
With the airline space being densely populated, the task of selecting the right stocks is by no means an easy one. The process is akin to searching for ‘a needle in a haystack’ unless one is aware of an appropriate method to make the right choice.
One way to narrow down the list of choices is by looking at stocks with a favorable Zacks Rank of #1 (Strong Buy), 2 (Buy) or 3 (Hold) alongside a positive Earnings ESP.
Earnings ESP is our proprietary methodology to determine which stocks have the best chance to surprise in their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.
Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%. An earnings beat boosts investor confidence in the stock, which is reflected in its rapid price appreciation. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
5 Attractive Picks
With the aid of the above methodology, we have zeroed in on five airline stocks that are likely to report better-than-expected earnings per share in Q2. We believe that these stocks could turn out to be great additions to your portfolio and are worth a look.
Our first choice is Delta Air Lines (DAL - Free Report) . We expect the carrier to surpass expectations as it has an Earnings ESP of +1.83% and a Zacks Rank #1. The Zacks Consensus Estimate for Q2 has moved up 3.8% in the last two months to $1.64 per share. You can see the complete list of today’s Zacks #1 Rank stocks here.
United Continental Holdings (UAL - Free Report) , based in Chicago, is also expected to report better-than-expected Q2 earnings, by virtue of its Zacks Rank #1 and an Earnings ESP of +6.73%. The holding company for both United Airlines and Continental Airlines is expected to reveal its results on Jul 18. The Zacks Consensus Estimate for Q2 has climbed approximately 2.8% in the last two months to $2.23 per share.
Our next choice in the list of likely outperformers with respect to the bottom line in Q2 is the Fort Worth, TX-based American Airlines Group (AAL - Free Report) . The company sports a Zacks Rank #1 and has an Earnings ESP of +3.51%. The Zacks Consensus Estimate for Q2 has moved up 6.2% in the last two months to $1.71 per share. The carrier is expected to reveal its results on Jul 28.
Next, is Dallas-based, Southwest Airlines (LUV - Free Report) that carries a Zacks Rank #2 and has an Earnings ESP of +0.84%. The Zacks Consensus Estimate for Q2 has climbed 5.3% in the last three months to $1.19 per share. It is scheduled to reveal the results on Jul 27.
Our final choice is Seattle, WA-based Alaska Air Group (ALK - Free Report) . The company carries a Zacks Rank #2 and has an Earnings ESP of +2.04%. The Zacks Consensus Estimate for Q2 has increased approximately 5.2% in the last two months to $2.45 per share. The carrier is expected to unveil its results on Jul 20.
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