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Will Airline Stocks Take Off on Upbeat Thanksgiving Travel?
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Stocks in the airline space faced multiple challenges in the first three quarters of 2017. The space was hit by disruptions from back-to-back hurricanes, the devastating earthquake in Mexico and high costs.
Evidently, the Zacks Airline Industry had underperformed the S&P 500 Index in the first nine months of the current year. While the S&P 500 index gained 11.9%, the industry rallied 8.8%.
Turbulent Q3 for Airlines
The third quarter of 2017 was a huge victim of the difficulties facing airlines. However, major companies like Delta Air Lines (DAL - Free Report) , Southwest Airlines Co. (LUV - Free Report) , American Airlines Group (AAL - Free Report) , Spirit Airlines (SAVE - Free Report) and United Continental Holdings (UAL - Free Report) reported better-than-expected earnings per share in the quarter. The outperformance with respect to the bottom line can be mainly attributed to reduced expectations.
Earnings per share, however, decreased on a year-over-year basis due to higher costs. While the bottom line fell 7.6% and 5.4% at Delta and Southwest Airlines, respectively, at United Continental the metric was down 28.6%. American Airlines too reported a significant reduction in earnings in the quarter.
Also, multiple flight cancellations as well as continued soft demand for air travel to and from the affected areas due to the recent natural calamities hurt third-quarter results. For example, United Continental’s pre-tax income was hurt to the tune of approximately $185 million.
Brighter Q4 Awaits Airlines?
The worst seems to be over for airline stocks as its operations are back to normal. This is evident from Delta’s bullish view for the final quarter of 2017 particularly on passenger revenues per available seat miles (PRASM: a key measure for unit revenues). In fact, this airline behemoth expects the metric to increase in the band of 2% to 4% (on a year-over-year basis) in the same period. The projection compares favorably with the 1.9% increase in PRASM recorded in the third quarter.
At American Airlines, total revenue per available seat miles (TRASM) improved only 1.1% in the third quarter of 2017. However, the fourth-quarter TRASM view is much brighter. The metric is expected to increase between 2.5% and 4.5% in the final quarter of 2017.
Based on the bullish views, we expect airlines to perform better in the final quarter compared with the turbulent third quarter. Notably, strong demand for air travel backed by cheap ticket prices are expected to support the sector participants.
Will Airlines Stocks Fly High on Thanksgiving Holiday Period?
The resurgence of the key players in the airline space is evident from the bullish outlook provided by the Airlines for America (“A4A”) in the ongoing Thanksgiving holiday period (Nov 17–Nov 28).
Per the guidance, approximately 28.5 million passengers are expected to avail the U.S. airlines’ services in the current holiday period this year, up 3% year over year. The forecast translates into 2.38 million fliers per day during the period, which is an increase of 69,000 from the comparable figure last year.
Passenger volumes (on a daily basis) is projected to be in the range of 1.61 million to 2.88 million. The bullish forecast was primarily owing to cheap ticket prices. Consequently, the carriers had to add more seats to meet the surge in demand.
Factors Supporting Turnaround in the Airlines Space
An improving economy, a much-improved job market and rising disposable income have been a blessing for the sector participants. Also, consumer confidence remains strong resulting in more Americans going on vacations.
Despite the recent rally, oil prices are still hovering around the $58 a barrel, a long way off the highs of mid-2014 when the commodity had traded in excess of $100 a barrel. As fuel costs represent one of the largest input costs for airline companies, the lower the oil prices, the better it is for sector participants. In fact, lower oil prices imply greater financial well-being for airlines by virtue of massive savings.
Moreover, a hike in dividend payouts this year by Southwest Airlines and Delta Air reflects financial prosperity in the airline space. In addition, Hawaiian Holdings’ (HA - Free Report) recent decision to reward shareholders with dividend payments is indicative of strong financial health.
Impressive Stock Price performance so far in Q4
Shares of JetBlue Airways (JBLU - Free Report) , Delta and American Airlines are up 7.1%, 3.9% and 2.2%, respectively, on a quarter-to-date basis. This reflects that things are looking up for airlines.
Also, the Zacks Airline industry has outperformed the S&P 500 Index on a quarter-to-date basis. While the industry rallied 4.5%, the S&P 500 Index has gained 3.6% in the same period.
Improving Zacks Industry Rank
The Zacks Industry rank of 87 carried by the 26-member Zacks Airline Industry also highlights the fact that airline stocks are back in favor. The favorable rank places the industry in the top 34% of the 250+ groups enlisted. The bullish stance on the industry is further augmented by the fact there have been 12 positive estimate revisions in the fourth quarter of 2017.
The improving scenario for the airline space can be well gauged from the fact that the Zacks Industry Rank has improved immensely, given the industry’s 200+ rank only a few months ago.
Valuation Signals More Upside
Going by the EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) ratio, which is often used to value airline stocks, given their significant debt levels and high depreciation and amortization expenses, the industry doesn’t look expensive at this point.
The industry currently has a trailing 12-month EV/EBITDA ratio of 8.1, which is favorable compared to what the industry saw in the last year. The ratio is below the high end of 8.5 during the period.
Additionally, the reading compares favorably with the market at large, as the current EV/EBITDA for the S&P 500 is at 11.3. The industry’s favorable positioning compared with the overall market certainly signals more upside.
Will You Make a Fortune on the Shift to Electric Cars?
Here's another stock idea to consider. Much like petroleum 150 years ago, lithium power may soon shake the world, creating millionaires and reshaping geo-politics. Soon electric vehicles (EVs) may be cheaper than gas guzzlers. Some are already reaching 265 miles on a single charge.
With battery prices plummeting and charging stations set to multiply, one company stands out as the #1 stock to buy according to Zacks research.
Image: Bigstock
Will Airline Stocks Take Off on Upbeat Thanksgiving Travel?
Stocks in the airline space faced multiple challenges in the first three quarters of 2017. The space was hit by disruptions from back-to-back hurricanes, the devastating earthquake in Mexico and high costs.
Evidently, the Zacks Airline Industry had underperformed the S&P 500 Index in the first nine months of the current year. While the S&P 500 index gained 11.9%, the industry rallied 8.8%.
Turbulent Q3 for Airlines
The third quarter of 2017 was a huge victim of the difficulties facing airlines. However, major companies like Delta Air Lines (DAL - Free Report) , Southwest Airlines Co. (LUV - Free Report) , American Airlines Group (AAL - Free Report) , Spirit Airlines (SAVE - Free Report) and United Continental Holdings (UAL - Free Report) reported better-than-expected earnings per share in the quarter. The outperformance with respect to the bottom line can be mainly attributed to reduced expectations.
All the above-mentioned companies carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Earnings per share, however, decreased on a year-over-year basis due to higher costs. While the bottom line fell 7.6% and 5.4% at Delta and Southwest Airlines, respectively, at United Continental the metric was down 28.6%. American Airlines too reported a significant reduction in earnings in the quarter.
Also, multiple flight cancellations as well as continued soft demand for air travel to and from the affected areas due to the recent natural calamities hurt third-quarter results. For example, United Continental’s pre-tax income was hurt to the tune of approximately $185 million.
Brighter Q4 Awaits Airlines?
The worst seems to be over for airline stocks as its operations are back to normal. This is evident from Delta’s bullish view for the final quarter of 2017 particularly on passenger revenues per available seat miles (PRASM: a key measure for unit revenues). In fact, this airline behemoth expects the metric to increase in the band of 2% to 4% (on a year-over-year basis) in the same period. The projection compares favorably with the 1.9% increase in PRASM recorded in the third quarter.
At American Airlines, total revenue per available seat miles (TRASM) improved only 1.1% in the third quarter of 2017. However, the fourth-quarter TRASM view is much brighter. The metric is expected to increase between 2.5% and 4.5% in the final quarter of 2017.
Based on the bullish views, we expect airlines to perform better in the final quarter compared with the turbulent third quarter. Notably, strong demand for air travel backed by cheap ticket prices are expected to support the sector participants.
Will Airlines Stocks Fly High on Thanksgiving Holiday Period?
The resurgence of the key players in the airline space is evident from the bullish outlook provided by the Airlines for America (“A4A”) in the ongoing Thanksgiving holiday period (Nov 17–Nov 28).
Per the guidance, approximately 28.5 million passengers are expected to avail the U.S. airlines’ services in the current holiday period this year, up 3% year over year. The forecast translates into 2.38 million fliers per day during the period, which is an increase of 69,000 from the comparable figure last year.
Passenger volumes (on a daily basis) is projected to be in the range of 1.61 million to 2.88 million. The bullish forecast was primarily owing to cheap ticket prices. Consequently, the carriers had to add more seats to meet the surge in demand.
Factors Supporting Turnaround in the Airlines Space
An improving economy, a much-improved job market and rising disposable income have been a blessing for the sector participants. Also, consumer confidence remains strong resulting in more Americans going on vacations.
Despite the recent rally, oil prices are still hovering around the $58 a barrel, a long way off the highs of mid-2014 when the commodity had traded in excess of $100 a barrel. As fuel costs represent one of the largest input costs for airline companies, the lower the oil prices, the better it is for sector participants. In fact, lower oil prices imply greater financial well-being for airlines by virtue of massive savings.
Moreover, a hike in dividend payouts this year by Southwest Airlines and Delta Air reflects financial prosperity in the airline space. In addition, Hawaiian Holdings’ (HA - Free Report) recent decision to reward shareholders with dividend payments is indicative of strong financial health.
Impressive Stock Price performance so far in Q4
Shares of JetBlue Airways (JBLU - Free Report) , Delta and American Airlines are up 7.1%, 3.9% and 2.2%, respectively, on a quarter-to-date basis. This reflects that things are looking up for airlines.
Also, the Zacks Airline industry has outperformed the S&P 500 Index on a quarter-to-date basis. While the industry rallied 4.5%, the S&P 500 Index has gained 3.6% in the same period.
Improving Zacks Industry Rank
The Zacks Industry rank of 87 carried by the 26-member Zacks Airline Industry also highlights the fact that airline stocks are back in favor. The favorable rank places the industry in the top 34% of the 250+ groups enlisted. The bullish stance on the industry is further augmented by the fact there have been 12 positive estimate revisions in the fourth quarter of 2017.
The improving scenario for the airline space can be well gauged from the fact that the Zacks Industry Rank has improved immensely, given the industry’s 200+ rank only a few months ago.
Valuation Signals More Upside
Going by the EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) ratio, which is often used to value airline stocks, given their significant debt levels and high depreciation and amortization expenses, the industry doesn’t look expensive at this point.
The industry currently has a trailing 12-month EV/EBITDA ratio of 8.1, which is favorable compared to what the industry saw in the last year. The ratio is below the high end of 8.5 during the period.
Additionally, the reading compares favorably with the market at large, as the current EV/EBITDA for the S&P 500 is at 11.3. The industry’s favorable positioning compared with the overall market certainly signals more upside.
Will You Make a Fortune on the Shift to Electric Cars?
Here's another stock idea to consider. Much like petroleum 150 years ago, lithium power may soon shake the world, creating millionaires and reshaping geo-politics. Soon electric vehicles (EVs) may be cheaper than gas guzzlers. Some are already reaching 265 miles on a single charge.
With battery prices plummeting and charging stations set to multiply, one company stands out as the #1 stock to buy according to Zacks research.
It's not the one you think.
See This Ticker Free >>