Stocks in the airline space are flying high lately on the back of improved unit revenue projections provided by the key sector players like JetBlue Airways (JBLU - Free Report) , American Airlines Group (AAL - Free Report) and United Continental Holdings (UAL - Free Report) .
The bullish projections bode well for the sector with a deluge of fourth-quarter earnings reports, scheduled to be released in the next few days/weeks. We note that Delta Air Lines had started the fourth-quarter earnings season on a favorable note. The carrier reported better-than-expected earnings per share and revenues. This Zacks Rank #3 (Hold) company also performed well on the unit revenue front. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Impressive Price Performance
Post hurricanes, the airline stocks are back in favor. This is highlighted by the fact that the Zacks Airline Industry has outperformed the S&P 500 Index in the last three months. While the S&P 500 index gained 9.1%, the industry rallied 10.7%.
Bullish Q4 Unit Revenue Views Bode Well
As we head into the busy part of the earnings season, the impressive fourth-quarter projections for unit revenues, measure of sales relative to capacity for a carrier, boost the overall sentiment around the airlines stocks.
For example, American Airlines now expects total revenue per available seat mile (TRASM) for the fourth quarter to rise in the range of 5-6% year over year. Previous view was an increase in the band of 2.5-4.5%. The improved outlook comes on the back of higher yields across all the geographical regions and better-than-expected domestic close-in bookings.
Additionally, the company anticipates pre-tax margin between 6.5% and 7% for the to-be-reported quarter. Earlier forecast was in the range of 4.5-6.5%. JetBlue Airways expects TRASM to increase approximately 1.8%. Previous view had hinted the metric in the band of -0.5% to +1.5%.
United Continental too provided an improved fourth-quarter outlook with respect to passenger unit revenues (PRASM). The company now expects the metric to be flat year over year (previous guidance had projected the metric in the band of down 2% to flat). Pre-tax margin (adjusted) is anticipated between 6% and 7% (previous guidance had projected the metric in the band of 3% to 5%).
Non-Fuel Unit Costs Likely to Hurt Less in Q4
Apart from bullish unit revenues, the bottom lines of carriers are likely to be less severely impacted by non-fuel unit costs in the fourth quarter. This is evident from the improved outlook provided by the key sector players with respect to cost per available seat miles (excluding fuel).
For example, United Continental non-fuel unit costs (excluding profit sharing) are expected to grow between 1.5% and 2% (previous guidance had projected the metric to grow in the band of 2.5% to 3.5%). Allegiant Travel Company now expects the metric to increase in the band of 5.3% to 5.7% (previous outlook was in the range of 7% to 9%).
Airlines Should be Present in Your Portfolio
Given the positive sentiment surrounding the airline stocks, we believe that it is prudent to add these companies to one’s portfolio now. However, with multiple carriers present the task of selecting the right ones for handsome returns is not an easy one. The task of identifying a winning stock is akin to searching for a needle in a haystack, for an investor in the absence of proper guidance.
This is where the Zacks Rank, which justifies a company's strong fundamentals, can come in really handy. Markedly, the Zacks Rank is a reliable tool that helps investors to trade with confidence regardless of their trading style and risk tolerance. To learn more about how you can use this proven system for market-beating gains, visit Zacks Rank Education.
Based on favorable Zacks Ranks (#1 or 2), we have zeroed in on four airline stocks. Moreover, they have a VGM score of A. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score.
All the four stocks have outperformed the Zacks Airline industry’s gain of 17.5% in a year’s time.
Deutsche Lufthansa Aktiengesellschaft functions as aviation company in Germany as well as internationally. The company sports a Zacks Rank #1. The Zacks Consensus Estimate for full-year 2017 earnings climbed 50.1%, in the last 90 days. Shares of Deutsche Lufthansa have skyrocketed more than 200% in a year.
Gol Linhas Aereas Inteligentes S.A. (GOL - Free Report) is a low-cost and low-fare carrier, headquartered in Sao Paulo, Brazil. The company has a market capitalization of $1.4 billion and flaunts a Zacks Rank #1.
In the last 90 days, the company has seen the Zacks Consensus Estimate earnings in the fourth quarter of 2017 being revised 66.7% upward. An increased demand for air travel on the back of an improving Brazilian economy should drive the company’s growth. Shares of GOL Linhas have skyrocketed more than 100% in a year.
SkyWest (SKYW - Free Report) is the holding company for two scheduled passenger airline operations and an aircraft leasing company. The stock carries a Zack Rank #2 (Buy) and has a market capitalization of $2.7 billion.
In the last 90 days, the company has seen the Zacks Consensus Estimate earnings in the fourth quarter of 2017 being revised 4.4% upward. Shares of SkyWest have increased 48% in a year.
LATAM Airlines Group S.A. (LTM - Free Report) is a provider of passenger and cargo air transportation services in South America, North/Central America, Europe, Africa, Asia, and Oceania. This Zacks Rank #2 carrier is based in Santiago, Chile. Shares of the company have increased more than 74% in a year.
In the last 90 days, the company has seen the Zacks Consensus Estimate earnings in the fourth quarter of 2017 being revised 4.8% upward.
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