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United Continental's Q4 Buoys Airlines: 4 Stocks to Buy

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Investors interested in the airline space have not had much to cheer about lately. Headwinds ranging from high costs, capacity woes and weather-related issues have prevented airline stocks from flying high. The dismal price performance of the Zacks Airline industry in a year’s time bears testimony to the challenges. The industry has shed 26.3% value in the period, making its performance worse than that of the Zacks S&P 500 composite, which has declined 6.6%.

 

Why Airlines Had a Field Day on Wednesday?

Despite the aforementioned challenges, airline investors heaved a sigh of relief on Jan 16. The catalyst was the impressive Q4 earnings report of one of the airline heavyweights — United Continental Holdings (UAL - Free Report) — which was released on Jan 15, after market close. The company’s blowout Q4 earnings report and upbeat guidance boosted the entire industry with key players gaining handsomely in the next trading session.

Naturally, the United Continental stock is flying high after its earnings report. The stock gained 6.4% on Jan 16, closing the day at $86.36. Other airline stocks like American Airlines (AAL - Free Report) , SkyWest (SKYW - Free Report) , JetBlue Airways (JBLU - Free Report) and Alaska Air Group (ALK - Free Report) also saw their stock prices appreciate to the tune of 2.3%, 1.8%, 1.1% and 1%, respectively. Consequently, the industry tracker — NYSE ARCA Airline Index —moved northward, gaining 1.9% on Jan 16.

Why United Continental’s Report Excited Investors

The Chicago-based United Continental reported better-than-expected earnings per share and revenues in Q4. Moreover, both metrics improved on a year-over-year basis. Factors like efficient cost management and uptick in airfares drove results.

The company’s performance on the unit revenue front was also impressive with passenger revenue per available seat mile (PRASM: a key measure of unit revenues) increasing 5%. Non-fuel unit costs dipped 0.7% in the final quarter of 2018.

The carrier’s efforts to reward shareholders through buybacks also raise optimism. During Q4 and full-year 2018, United Continental repurchased shares worth $240 million and $1.25 billion, respectively. It is also active on the fleet modernization front. Toward this end, it is replacing outdated planes and adding new ones to its fleet. As an evidence, the carrier finalized an order for 24 additional Boeing 737 MAX jets in December. The planes will bolster the carrier’s fleet from 2020 onward.

The airline expects to continue its prudent cost-management strategy going forward too. It expects non-fuel unit costs to be “flat or better” in Q1 and full-year 2019 as well. PRASM in Q1 is expected to be flat or increase up to 3%. Moreover, EPS for full-year 2019 is anticipated in the $10-$12 band, higher than the $9.13 per share reported in full-year 2018.

Will Other Airlines Follow United Continental?

Now, the burning question is whether other earnings reports from the airline industry be as impressive as that of United Continental? While it is impossible to be sure about what awaits the industry in the remainder of Q4, the pointers are certainly encouraging.

It is known to all that costs associated with oil are considered major inputs for any airline company. Airlines have been well served in this regard as oil prices declined nearly 40% in the Q4 period (October-December). In fact, oil prices had displayed an uptrend till early October. However, the commodity displayed a downward trend for the remainder of Q4 on fears of supply glut and economic headwinds. The sharp drop in oil prices is likely to fuel bottom-line growth. Moreover, reduced tax rates, courtesy of the current tax law, should also brighten airlines’ Q4. Also, robust traffic during the Thanksgiving holiday period should boost Q4 results.

4 Airline Stocks to Buy Now

Driven by the aforesaid factors airlines are expected to fly high in Q4. Based on the buoyancy, we believe that it is prudent to add airline stocks 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.

This is where the Zacks Rank, which justifies a company's strong fundamentals, can come in really handy. Based on a favorable Zacks Rank (#1 or 2), we have zeroed in on four airline stocks that should be present in one’s portfolio for handsome returns.

Spirit Airlines (SAVE - Free Report) , headquartered in Miramar, FL, provides low-fare airline services. The stock currently has a Zacks Rank #1 (Strong Buy). It has outshined the Zacks Consensus Estimate for earnings in each of the trailing four quarters. The average positive surprise is 3.2%. The Zacks Consensus Estimate for its fourth-quarter earnings surged 91% in the past 60 days. The company is expected to report fourth-quarter results on Feb 6. You can see the complete list of today’s Zacks #1 Rank stocks here.

Alaska Air Group, based in Seattle, WA, together with its partner regional carriers, serves more than 100 cities across North America. The stock currently has a Zacks Rank #2 (Buy). It has outshined the Zacks Consensus Estimate for earnings in three of the trailing four quarters. The average positive surprise is 8.8%. The Zacks Consensus Estimate for its fourth-quarter earnings increased 65.1% in the past 60 days. The company is scheduled to report fourth-quarter results on Jan 24.

Based in Las Vegas, Allegiant Travel Company (ALGT - Free Report) is the parent company of Allegiant Air. The company, carrying a Zacks Rank #2, offers air travel both on a stand-alone basis and bundled with hotel rooms, rental cars and other travel-related services. It has outshined the Zacks Consensus Estimate for earnings in three of the trailing four quarters. The average positive surprise is 18.7%. The stock has seen the Zacks Consensus Estimate for fourth-quarter earnings being revised 21.9% upward in the last 60 days. The company is scheduled to report fourth-quarter results on Jan 30.

American Airlines operates more than 6,700 daily flights to over 330 destinations in more than 50 nations across the globe from its hubs.  American Airlines is headquartered in Fort Worth, TX and carries a Zacks Rank #2. It has outshined the Zacks Consensus Estimate for earnings in each of the trailing four quarters. The average positive surprise is 2%. The stock has seen the Zacks Consensus Estimate for fourth-quarter earnings being revised 33.7% upward in the last 90 days. The company is scheduled to report fourth-quarter results on Jan 24.

 

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