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SkyWest, Air France-KLM, Facebook, Twitter and Snapchat highlighted as Zacks Bull and Bear of the Day

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For Immediate Release

Chicago, IL – April 24, 2019 – Zacks Equity Research SkyWest Inc (SKYW - Free Report) as the Bull of the Day, Air France-KLM (AFLYY - Free Report) as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Facebook , Twitter and Snapchat (SNAP - Free Report) .

Here is a synopsis of all five stocks:

Bull of the Day:

Airlines are notoriously tough to value. It can be a great business, but it’s extremely economically sensitive. Airlines have huge fixed costs and revenues and variable costs are highly variable and often totally out of their control.

Airline earnings performance tends to follow the general economy – when consumers have discretionary income, they tend to fly more and pay more per seat – but even those prices can fluctuate during destructive price wars.

Fuel costs are a major factor in profitability and when the price of oil rises, airline operating expenses tend to rise as well. The airlines have to operate each scheduled flight, regardless of how many of the seats were sold – and regardless of how much expensive fuel they’re about to burn.

SkyWest Inc is a regional US airline that sidesteps much of the cost variability associated with airline by operating primarily under “code-sharing” agreements with larger carriers like United, American, Delta and others.

A code sharing agreement involves the process by which one airline publishes and sells a flight under its own designator and flight code, but contracts with another carrier to provide the aircraft, flight and ground crews and other administrative services.

These agreements allow the big airlines more flexibility, especially in serving smaller markets or offering connections to out of the way locations. It also reduces redundancy in the industry as a whole as passengers who have booked their flight through two different carriers might be on the same actual flight, instead of two half-full airplanes simultaneously flying the same route.

As the largest regional carrier in the US, SkyWest operates more than 2,300 flights per day to more than 250 cities in the US, Canada and Mexico and carries almost 40 million passengers per year.

SkyWest operates a total of 482 relatively small jets with between 50 and 76 seats from two manufacturers – Bombardier and Embraer. They do not fly the Boeing 737 MAX that has been plagued by recent technical difficulties, causing flight cancellations at other carriers.

Just like compact cars, their modern, efficient aircraft use considerably less fuel than jumbo jets.

SkyWest’s flights are spilt primarily between express service between adjacent big cities like Los Angeles and San Francisco, and connections to smaller markets like Boise and Palm Springs. With 482 planes flying 2,300 times a day, the average SkyWest aircraft takes off and lands an average of almost 5 times a day.  

Over 90% of SkyWest’s contracted flights are “fixed-fee,” meaning that they are paid the same rate by the ticket-selling carrier, regardless of the number of seats that are actually filled. This greatly reduces the variability in revenues and costs that plague larger airlines.

That consistency is evident in SkyWest’s earnings, with net earnings continuing to increase even when revenues fluctuate. A superior cost structure when compared to other airlines allows SkyWest to improve margins and deliver to the bottom line.

Note that in the Zacks Consensus estimates, although sales are expected to soften over the year-ago period, estimates for net earnings continue to rise. Recent upward revisions make SkyWest a Zacks Rank #1 (Strong Buy).

Bear of the Day:

Today’s Bull of the Day was a US regional airline that is in a position to take advantage of favorable economic conditions while avoiding many of the inherent risks associated with this unique industry.

The other side of the coin is Air France-KLM, an international carrier that’s staring right down the barrel of some of those risks.

The result of a 2004 merger of Air France and the Netherlands-based KLM, AIr France-KLM is a giant in the industry – consistently near the top in terms of revenues, yet often has a hard time turning big revenues into equally big net profits.

Operating large planes over long routes, Air France-KLM has one of the highest cost structures in the industry, especially because of a strike-happy labor force that costs the airline up to 50% more than the labor bill at competitors as a percentage of revenue.

French Pilots union SNPL is threatening another strike this year. Its complaint is not against any specific airline, but rather the possible passage of a law in the UK parliament that would group them together with other labor unions and dilute their negotiating leverage. The threatened week-long walkout would be disastrous to Q2 results at Air France-KLM.

Another big cost risk for a big airline is fuel, and the cost of oil – which has risen more than 50% in the past 5 months – is poised to spike again amid news of the Trump administration’s plans to end waivers to sanctions on purchases of Iranian oil.

In a move intended to economically strangle the leadership in Tehran, the US announced that the waivers - which were originally granted to seven of our most important trading partners - would expire on May 2nd and would not be renewed. Another rise in the price of oil would significant hurt margins at Air France-KLM.

Finally, there’s a wildcard risk associated with airlines that operate Boeing’s 787 aircraft. After bad press associated with Boeing’s smaller 737MAX aircraft when two fatal crashes in 6 months were blamed on the plane’s technology, all countries grounded the planes and flight schedules had to be hastily rearranged at significant cost to the carriers.

Now, there’s focus on potential safety issues with the 787 as well.

Though Boeing denies the claims and no accidents have been associated with the alleged defects, several recent expose pieces have claimed that the 787 suffers from defects from with shoddy manufacturing processes.

Air France-KLM operates 20 787s, and though there’s no reason to believe that the current claims will affect operation of the aircraft, investors will have to be mindful of the risk.

Thanks in large part to cost concerns and other risks, earnings estimates at Air France-KLM have been falling lately, earning the airline a Zacks Rank #5 (Strong Sell).

Additional content:

What to Expect from Facebook’s Earnings?

Facebook is reporting its Q1 earnings after market-close on Wednesday, April 24th. They are expected to report an EPS of $1.65 which would represent a 2.3% decline from Q1 2018. FB is estimated to report $15 billion in quarterly revenue on Wednesday which would illustrate 31% YoY growth. FB has had solid earnings in the previous two quarters showing double digit earnings beats and a corresponding price increase of 6.8% & 15.6% respectively.

FB has consistently been able to grow its core user base with 1.5 billion daily active users and 2.3 billion monthly active users (this data is purely Facebook not including Instagram or WhatsApp). This is an astounding figure considering that only 3.2 billion people on Earth have access to the internet. That means that 72% of humans with internet access will check their Facebook at least once a month and 47% are using it daily. You would think the user growth would plateau when they have almost reached their entire reachable market, but their user base is still quickly expanding in the Asian-Pacific regions as well as developing countries across the world. As more people get access to internet, the total reachable market will continue to grow.

Facebook has been able to double its revenue over the past two years, further monetizing its platforms. With FB’s extensive user data they are able to tailor ads for individual users based on search and consumption patterns. The average revenue per users (ARPU) was $24.96 for 2018 representing a 24% expansion YoY. The most significant portion of FB’s revenue comes from the US and Canada which makes up about 50% of revenues but only represents 12% of Facebook’s total daily users. ARPU for North America was $111.97 which was a 33% jump from 2017.

There is still a lot of opportunity for FB to further monetize its users outside of North America and with consistent user growth, FB’s future outlook appears to be positive.

FB owns the most preferred messaging app in the world today, WhatsApp. Facebook also owns Instagram, a must have social media platform with over 1 billion active monthly users, having doubled over the past 2 years. Instagram has gained popularity because of its simplicity, aesthetically pleasing and user-friendly platform. Facebook originally bought Instagram for $1 billion back in 2013 and the company is now estimated to be worth over $100 billion today, a very savvy acquisition.

Facebook is operating in a very competitive space but they seem to be able to stay ahead of an endlessly shifting curve. Facebook and Instagram users continue to grow as other social media platforms seem to be hitting a plateau, such as Twitter and Snapchat who both saw user declines in recent quarters.

FB is currently trading at a favorable multiples in its shift from a young growth stock to an established value stock with a 22x forward P/E. The company is still growing like a young start-up though with expected revenue growth being over 20% for both 2019 and 2020, according to sell-side analysts. This could be an opportunity to get into a perpetually growing FAANG stock that’s still 17% off its high.

When reviewing FB’s earnings that will be released after market close on Wednesday, keep an eye on monthly active users as well as management’s guidance and sentiment on the ability to further monetize the Asian-Pacific & developing markets. Considering FB’s previous 2 earnings beats, this negative growth EPS estimate might be a little conservative and a potential earnings surprise could have a substantial material effect on FB to the upside.

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