The current projection for Q1 earnings season is very encouraging. Per the latest earnings preview, the bottom line for S&P 500 companies is expected to expand at a highly impressive rate of 16% on a year-over-year basis. Total revenues for the same set of companies are projected to grow 7.4%. The report further predicts that 14 of the 16 Zacks sectors will end the Q1 earnings season with the bottom line improving year over year. Out of which, 11 are projected to exhibit double-digit earnings growth.
One of those sectors is the transportation sector, wherein earnings are anticipated to increase 14.3%. Notably, this highly diversified sector includes airlines among others. We believe that the favorable economic indicators along with promising fiscal and regulatory policies from the current administration bode well for the sector.
The Q1 earnings season will be kicked off by Delta Air Lines, Inc. (DAL) on Apr 12. The company carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Multiple Headwinds Hurt Airlines in Q1
Airline stocks had a rough time in the January-March period mainly due to weather-related disruptions. Notably, key players in this space had to cancel multiple flights in the first quarter due to quite a few storms in the first quarter. Apart from Winter Storm Grayson in January, successive nor’easters in March disrupted airline operations significantly due to multiple flight cancellations.
In fact, in March, there were reportedly more than 10,000 flight cancellations due to successive nor’easters. It is believed to be the worst month in five years in this regard. The increase in the number of flight cancellations in the first quarter resulted in significant revenue losses for airline operators and this is likely to hurt top-line growth in the upcoming earnings season.
Additionally, oil prices were up approximately 8% in the January-March period. On Mar 21, crude had jumped above the psychologically important $65 per barrel level, representing a spectacular recovery from the $26 a barrel mark touched in late February 2016. In fact, the first quarter of 2018 saw U.S. oil benchmark attain its highest settlement since December 2014.
We note that high oil prices do not bode well for companies in the airline space as fuel costs account for a significant chunk of their expenditures. Given this backdrop, we expect high fuel costs to limit bottom-line growth of carriers in Q1.
Zacks Industry Rank
The above struggles for the airline space is well reflected by the bearish Zacks Industry Rank of 169 carried by the 27-member Zacks Airline industry. Notably, the unfavorable rank places the industry in the bottom 34% of the 250+ groups. We put our entire 250-plus industries into two groups: the top half (i.e., industries with the best average Zacks Rank) and the bottom half (the industries with the worst average Zacks Rank).
Over the last 10 years, using a one week rebalance, the top half outpaced the bottom half by a factor of more than 2 to 1.
The Zacks Industry Rank for this sector has also improved immensely, given the industry’s 200+ rank only a few months ago.
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Some Prevalent Tailwinds
Despite the above-mentioned challenges, there are a few bright spots in the sector. Evidently, the unit revenue scenario is steadily improving for airline stocks. This can be made out from the bullish Q1 unit revenue forecasts from leading carriers like Delta and United Continental.
The improved unit revenue projections highlight the strong demand for air travel on the back of a buoyant U.S. economy. Furthermore, the bullish forecast for spring travel by the Airlines for America (‘A4A’) — a premier trade organization — highlights the improvement on the revenue front. In fact, strong demand for air travel backed by an improving economy, a much-improved job market and rising disposable income is likely to aid results in the to-be-reported quarter.
Moreover, the conservative nature of the Zacks Consensus Estimate on multiple downward revisions due to the above headwinds may not make earnings outperformance too difficult for carriers in the soon-to-be reported quarter. For example, the Zacks Consensus for the first quarter of 2018 at United Continental is 27 cents per share, comparatively less than the year-ago figure of 37 cents. Moreover, in the preceding quarter, the consensus mark for earnings in was pegged at $1.34 at United Continental. Naturally, the lowered bar should make it easier for companies to surpass the Zacks Consensus Estimate in Q1.
In view of the above commentary, it would not be a bad idea to add airline stocks, despite the above-mentioned hiccups, to one’s portfolio for handsome returns.
Selection of Outperformers
With the airline space being densely populated, the task of selecting the right stocks is by no means an easy one. Given the numerous stocks in the sector that almost always muddle one’s stock-picking prowess, the Zacks methodology might provide some relief.
Our research shows that for stocks with the combination of a Zacks Rank #1, 2 (Buy) or 3 and a positive Earnings ESP, the chance of a positive earnings surprise is as high as 70%. You may uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
5 Airline Picks
Based on the above methodology, we have zeroed in on five airline stocks that are likely to surpass the Zacks Consensus Estimate for earnings in Q1. In fact, an earnings beat boosts investors’ confidence in the stock, which is reflected in its rapid price appreciation. These stocks should therefore turn out to be great additions to your portfolio ahead of their earnings releases.
American Airlines Group Inc. (AAL - Free Report) headquartered in Fort Worth, TX, operates more than 6,700 daily flights to over 330 destinations in more than 50 nations across the globe. The company has a Zacks Rank #3 and an Earnings ESP of +17.00%. This is because the Most Accurate estimate is pegged at 10 cents above the Zacks Consensus Estimate of 58 cents. The favorable combination makes an earnings beat likely in the quarter.
The stock has seen the Zacks Consensus Estimate for first-quarter earnings being revised 9.4% upward over the last 30 days. American Airlines is expected to report first-quarter 2018 results on Apr 26.
United Continental Holdings (UAL - Free Report) , based in Chicago, is also expected to report better-than-expected earnings by virtue of its Zacks Rank #2 and an Earnings ESP of +6.51%. This is because the Most Accurate estimate is pegged at 2 cents above the Zacks Consensus Estimate of 27 cents.
This holding company for both United Airlines and Continental Airlines is scheduled to reveal its results on Apr 17. The stock has seen the Zacks Consensus Estimate for first-quarter earnings being revised upward in excess of 100% over the last 30 days.
Spirit Airlines, Inc. (SAVE - Free Report) , based in Miramar, FL, is also expected to report better-than-expected earnings by virtue of its Zacks Rank #3 and an Earnings ESP of +1.49%. This is because the Most Accurate estimate is pegged at a cent above the Zacks Consensus Estimate of 37 cents.
This low-cost carrier is scheduled to reveal its results on Apr 26. The stock has seen the Zacks Consensus Estimate for first-quarter earnings being revised 8.8% upward over the last 30 days.
Our next choice is Alaska Air Group, Inc. (ALK - Free Report) , the holding company of primarily Alaska Airlines, Virgin America and Horizon Air Industries. The company, which is based in SeaTac, WA, has a Zacks Rank #3 and an Earnings ESP of +5.81%. This low-cost carrier is scheduled to reveal its results on Apr 23.
Finally, Hawaiian Holdings, Inc. (HA - Free Report) — the parent company of Hawaiian Airlines — has a Zacks Rank #3 and an Earnings ESP of +2.85%. This is because the Most Accurate estimate is pegged at 2 cents above the Zacks Consensus Estimate of 82 cents. The favorable combination makes an earnings beat likely in the quarter for this Honolulu County, HI carrier.
Hawaiian Holdings is scheduled to reveal its results on Apr 24. The stock has seen the Zacks Consensus Estimate for first-quarter earnings being revised 24.2% upward over the last 30 days.
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