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What's in Store for United Continental (UAL) in Q4 Earnings?

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United Continental Holdings, Inc. (UAL - Free Report) is scheduled to report fourth-quarter 2018 results on Jan 15, after the market closes.

Last reported quarter, the company reported a negative earnings surprise of approximately 1%. However, the bottom line improved year over year despite high fuel costs. Operating revenues also outpaced the Zacks Consensus Estimate. Moreover, the top-line figure was up 11.2% year over year.

Let’s see how things are shaping up for this earnings season.

Factors Likely at Play

The company has been witnessing strong travel demand, evident from the 8.8% rise in passenger revenues during the first three quarters of 2018. This tailwind is anticipated to boost passenger revenues in the fourth quarter as well, thus aiding the top line.

Additionally, successive increase in load factor (percentage of seats filled by passengers) over the past few months indicates the carrier’s operating efficiency and profitability position. Improvement in this key metric is estimated to boost overall results in the to-be-reported quarter. The Zacks Consensus Estimate for consolidated load factor in the fourth quarter stands at 83% compared with 82% a year ago.

Further, the Chicago, IL-based airline is anticipated to perform impressively on the unit revenue front. Passenger unit revenues are projected to rise 3-5% year over year in the to-be-reported quarter. The Zacks Consensus Estimate for fourth-quarter passenger revenues stands at 13.77 cents, higher than 12.43 reported in the fourth quarter of 2017.

Moreover, consolidated cost per available seat mile excluding third-party business expenses, fuel & profit sharing is expected to either remain flat or dip up to 1% year over year in the final quarter. This lowered expenditure apart from reduced tax rates are likely to aid bottom-line growth.

However, high fuel expenses might be a drag on earnings growth in the quarter. Although fuel prices remained at a low level for the most part of the fourth quarter, the company’s forecast for fuel costs is much higher on a year-over-year basis. It envisions fuel costs per gallon between $2.41 and $2.46 in the final quarter of 2018, much higher than $1.91 in the prior-year period. The Zacks Consensus Estimate for the same stands at $2.41.

Additionally, the carrier is expected to incur a special non-cash impairment charge to the tune of $206 million ($160 million net of taxes) in the fourth quarter due to high costs pertaining to its Hong Kong routes. The extra charge is because revenues have not increased enough to match the escalated expenses.

Earnings Whispers

Our proven model clearly indicates that a company needs to have the right combination of the following two key ingredients — a positive Earnings ESP and a favorable Zacks Rank #3 (Hold) or better — to increase the odds of an earnings surprise. However, that is not the case here as highlighted below.

Earnings ESP: United Continental has an Earnings ESP of 0.00% as both the Most Accurate Estimate and the Zacks Consensus Estimate are pegged at $1.84 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 #2 (Buy), which increases the predictive power of ESP. However, the company’s 0.00% ESP makes surprise prediction difficult.

We caution against all Sell-rated stocks (#4 or 5) going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Investors interested in the broader Transportation sector may consider JetBlue Airways Corporation (JBLU - Free Report) , ArcBest Corporation (ARCB - Free Report) and Delta Air Lines, Inc. (DAL - Free Report) as these possess the perfect mix of elements to beat on earnings this reporting cycle.

JetBlue has an Earnings ESP of +2.86% and a Zacks Rank of 2. The company will announce fourth-quarter results on Jan 24.

ArcBest has an Earnings ESP of +0.14% and a Zacks Rank #1 (Strong Buy). The company will report fourth-quarter financial numbers on Jan 30. You can see the complete list of today’s Zacks #1 Rank stocks here.

Delta Air Lines has an Earnings ESP of +1.06% and a Zacks Rank of 3. The company is scheduled to report fourth-quarter financial numbers on Jan 15.

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