An earnings season keeps investors busy in comparing estimates with actual outcomes. Prior to the releases, investors look to add stocks that have the potential to surpass earnings expectations. This is because more often than not, an earnings beat positively impacts the stock price. However, the million-dollar question is how to pick the potential winners?
Through this write-up, we intend to help investors zero in on airline stocks that are likely to report better-than-expected earnings per share in second-quarter 2018 despite headwinds like increasing fuel costs. We remind investors that airline stocks are an integral part of the Zacks Transportation sector.
Notably, the second-quarter earnings season will be kicked off by Delta Air Lines, Inc. (DAL - Free Report) on Jul 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.
Dull Sectoral Picture
The overall sentiment pertaining to airlines is anything but positive ahead of the earnings season. This is mainly because oil prices have been on the rise this year, shooting up by more than 20% so far. Apart from the geopolitical tensions in the Middle East, the economic crisis in Venezuela — a major oil exporter — and OPEC’s recent plans of a lower-than-expected output raise have backed the rally in oil prices. Since fuel expenses are significant for airlines, an increase in oil prices is unfavorable for the space.
Apart from high fuel costs, expenses on the labor front are likely to limit bottom-line growth for carrier in the second quarter. Also, capacity related woes might prevent airlines from flying high in the current earnings season. Capacity expansion may lead to oversupply in the market even as fuel costs remain well below the highs of mid-2014 despite the recent resurgence.
Moreover, airfares have remained low, with the metric declining in April, May and June. Although favorable for passengers, low air fares are a drag for airline companies. Customer-related issues represent another headwind for airlines.
For example, the flight 1380 incident on Apr 17 is still hurting Southwest Airlines Co. (LUV - Free Report) . In fact, this Dallas-based low-cost carrier trimmed its unit revenue view for the soon-to-be reported quarter mainly due to soft bookings on its flights after the unfortunate mid-air incident, which claimed one life and injured many.
Zacks Industry Rank Highlights the Struggles
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates continued underperformance in the near term.
The Zacks Airline industry currently carries a Zacks Industry Rank #230, which places it at the bottom 10% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
Not Thorns Alone, Some Roses Too
Despite the above-mentioned headwinds, the space is not totally bereft of positives. The airline industry is benefiting from strong demand for air travel. Declining air fares along with a much-improved job market and rising disposable income have provided consumers an added incentive to opt for air travel.
The bullish projection by the Airlines for America (A4A) for the ongoing summer season (Jun 1 – Aug 31) confirms the robust demand. The association expects the season to be the busiest one for U.S. carriers in terms of air travel. In keeping with the bullish projection, Delta and United Continental Holdings, Inc. (UAL) transported record number of passengers in June. While Delta carried 17.7 million passengers, 15.2 million passengers flew on United Continental flights in the month.
Furthermore, the solid financial health of most carriers has prompted them to indulge in shareholder-friendly activities (dividends and buybacks). For instance, Southwest Airlines raised its dividend payout during the second quarter of 2018. We expect an uptick in these shareholder-friendly activities from carriers following the new tax law. This is because with significant reduction in tax bills, more cash is expected to remain in the hands of these companies to fund capital expenditures, acquisitions and share repurchases among others.
In view of their strong balance sheets, carriers have been making significant investments to upgrade their fleet, to improve the flying experience of passengers. For example, JetBlue Airways Corporation (JBLU - Free Report) recently agreed to buy at least 60 A220-300 jets from Airbus.
Airlines Likely to Face Turbulence in Q2
The above write-up clearly suggests that the negatives will easily outweigh the positives in the airline space as we head into the second-quarter earnings season. In fact, the above-mentioned headwinds are likely to prevent stocks in the space from flying high this earnings season.
However, some airline stocks are still likely to report better-than-expected earnings per share in the soon-to-be-reported quarter. Moreover, the conservative nature of the Zacks Consensus Estimate for second-quarter earnings following multiple downward revisions due to the above headwinds may not make earnings beat too difficult for carriers this earnings season.
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.
4 Airline Picks
Based on the above methodology, we have zeroed in on four airline stocks that are likely to surpass the Zacks Consensus Estimate for second-quarter earnings. 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.
Delta Air Lines (DAL - Free Report) is headquartered in Atlanta, GA. The company has a Zacks Rank #3 and an Earnings ESP of +0.57%. This is because the Most Accurate estimate is pegged at 1 cent above the Zacks Consensus Estimate of $1.76. The favorable combination makes an earnings beat likely in the quarter.
Allegiant Travel Company (ALGT - Free Report) is the parent company of Allegiant Air. This Las Vegas-based stock has a Zacks Rank #3 and an Earnings ESP of +1.29%. This is because the Most Accurate estimate is pegged at 3 cents above the Zacks Consensus Estimate of $2.72. The favorable combination makes an earnings beat likely for this low-cost carrier, which will unveil its second-quarter earnings report on Jul 25.
JetBlue Airways Corporation (JBLU - Free Report) is a Long Island City, NY-based low-cost carrier. The company, which will report earnings on Jul 24, has a Zacks Rank #3 and an Earnings ESP of +2.74%. This is because the Most Accurate estimate is pegged at 1 cent above the Zacks Consensus Estimate of 38 cents. The favorable combination makes an earnings beat likely in the quarter.
LATAM Airlines Group S.A. (LTM - Free Report) is the final member in our list of potential outperformers. It is a provider of passenger and cargo air transportation services in South America, North/Central America, Europe, Africa, Asia, and Oceania. The company, which is expected to release its second-quarter earnings report on Aug 16, has a Zacks Rank #3 and an Earnings ESP of +14.29%.
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