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United Continental's (UAL) Q1 Earnings: A Beat in the Cards?

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United Continental Holdings, Inc. (UAL - Free Report) is slated to release its first-quarter 2018 results, after market close on Apr 17.

In the fourth quarter of 2017, the company delivered a positive earnings surprise of 4.5%. However, the bottom line contracted 21.4% on a year-over-year basis due to high costs. Meanwhile, the top line increased 4.3% year over year and also surpassed the Zacks Consensus Estimate. The metric was boosted by higher passenger and cargo revenues.

We expect this S&P 500 company to outperform on the bottom-line front in the quarter-to-be reported as well. Strong demand for air travel is likely to aid results. The stock has witnessed the Zacks Consensus Estimate for first-quarter earnings double over the last 30 days, reflecting optimism surrounding the stock.

Given this backdrop, let’s delve deeper to unearth the factors that are likely to influence the company’s first-quarter results:

We expect United Continental’s top line to be driven by higher passenger revenues owing to strong demand for air travel. Buoyed by the improved scenario, the company issued a bullish outlook with respect to consolidated passenger revenue per available seat miles (PRASM: a key measure of unit revenue) for the first quarter of 2018. PRASM is projected to increase 2.7% year over year in the quarter. The Zacks Consensus Estimate for first-quarter PRASM (consolidated) is pegged at 12.46 cents, higher than 12.23 cents in the fourth quarter of 2017.

Pre-tax margin (adjusted) is anticipated to expand around 2%. Additionally, capacity is estimated to grow 3.6% in the soon-to-be-reported.

We note that other airline players like American Airlines Group Inc. (AAL - Free Report) and JetBlue Airways Corporation (JBLU - Free Report) have also issued improved projections with respect to unit revenues for the first quarter of 2018. Apart from the strong demand for air travel, the unit revenue-related scenario is being aided by lower completion factor owing to increase in flight cancellations in the quarter due to foul weather conditions. Lower completion factor implies higher flight cancellations and a reduction in capacity. This, in turn, leads to increase in unit revenues.

However, we expect United Continental’s bottom-line growth to be restricted by increased costs (fuel and labor). Fuel price is forecasted to be $2.11 per gallon, in line with the Zacks Consensus Estimate. The projected figure is much higher than the $1.91 per gallon, reported by the company in the fourth quarter of 2017.

Also, oil prices have been on an uptrend lately. In the January-March period, the same was up approximately 8%. As fuel costs account for a significant chunk of expenditures for any airline company, it can easily be concluded that high fuel costs will limit bottom-line growth of carriers in the first quarter and United Continental is no exception.

Apart from high fuel costs, expenses on the labor front are likely to weigh on the bottom line of this Chicago-based carrier. The company expects unit costs (excluding fuel, profit sharing & third party business costs) to inch up 0.6% in the soon-to-be-reported quarter.  

What Does Our Model Say

Our quantitative model shows that United Continental is likely to beat earnings because it has the perfect combination of two key ingredients.

Zacks ESP: United Continental has an Earnings ESP  of +7.00% as the Most Accurate estimate is pegged at a cent above the Zacks Consensus Estimate of 26 cents per share. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: United Continental carries a Zacks Rank #3 (Hold). Note that stocks with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 have a significantly higher chance of beating earnings estimates. You can see the complete list of today’s Zacks #1 Rank stocks here.

Conversely, Sell-rated stocks (Zacks Rank #4 or 5) should never be considered going into an earnings announcement.

The combination of United Continental’s Zacks Rank #3 and a positive ESP makes us reasonably confident of an earnings beat.

The Zacks Consensus Estimate for first-quarter earnings moved south 35% on a year-over-year basis, mainly due to higher fuel costs. The same for sales is projected at $8.97 billion, up 6.5% year over year on the back of unit revenue growth.

Another Stock That Warrants a Look

Investors interested in the Zacks Airline industry may also consider Hawaiian Holdings, Inc. (HA - Free Report) as our model shows it possesses the right combination of elements to post an earnings beat in its next release.

Hawaiian Holdings has an Earnings ESP of +2.89% and a Zacks Rank #3. The company will release first-quarter 2018 results on Apr 24.

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