Time for Airline ETF After Solid Earnings Season? - ETF News And Commentary

The airline stocks, which were flying low for the last three months on a stronger dollar and global growth worries cutting back on frequent flies, gained altitude and picked up speed following robust earnings this season. As a result, the pure-play aviation ETF U.S. Global Jets ETF (JETS), which lost 2.9% in the last three-month period, advanced about 5% in the last one month (as of July 29, 2015) (read: The 13 Best and Most Interesting ETFs to Launch in the First Half of 2015).

In any case, cheap fuel has been a windfall for long. The mounting middle-income population in emerging markets is benefitting worldwide customer growth. Now solid earnings results from top-notch companies have come as a feather in the cap (read: 4 Ways to Short the Energy Sector with ETFs).

To add to this, United Continental Holdings Inc. (UAL) recently reduced its 2015 domestic capacity growth outlook. Delta Airlines (DAL) too plans to raise the rewards’ program fare prices from June 1, 2016. All these initiatives by major industry players are likely to shore up the pricing profile of the sector.

The sector is now in the top 44% category of the Zacks Industry Ranks. Let’s take a look at some of key earnings of the sector:

Delta Air Lines reported impressive better-than-expected earnings and revenues in the second quarter of 2015. To lessen the unfavorable impact of foreign exchange on its international operations, Delta plans to slash its international capacity by 3.5% in the fourth quarter of 2015. Delta’s domestic revenues were strong with about 5% growth. Delta expects weak fuel prices to stay and continue to benefit earnings for the rest of the year.

The carrier projects fuel costs per gallon in the band of $1.90 to $2.00 in the second half which is way below $2.65 per gallon noticed in the first half of 2015. The average fuel price at Delta in the second quarter of 2015 was $2.40 per gallon, down 18% sequentially. This Zacks ETF Rank #3 (Hold) stock has a Zacks Growth & Value style score of ‘A’.

United Continental came up with mixed Q2 results this month with an earnings beat and a revenue miss. Earnings were up 41.5% year over year on lower fuel costs. Revenues declined 4% on lower passenger revenues. Cargo revenues and other revenues were also downhill. Its indicators are also very promising with a Zacks ETF Rank #3, Growth, Value and Momentum scores of ‘A’.

Yet another leading U.S. carrier Southwest Airlines Co.’s (LUV) second-quarter 2015 bottom line matched the Zacks Consensus Estimate while the top line missed the same. But investors should notice that revenues grew 2% year over year helped by 2.1% and 4.5% expansion in Passenger and Freight revenues, respectively.

Airline traffic was up 7.9% while passenger load factor inched up to 84.6% from 83.9% recorded in the year-ago quarter. LUV, with a Zacks ETF Rank #3, also boasts hopeful indicators of Growth score of ‘B’ and Value score of ‘A’.

American Airlines Group (AAL) had a mixed quarter with a bottom-line beat and top line miss. Though this is a Zacks ETF Rank #5 (Strong Sell) stock and its operating metrics were downbeat in Q2, the company is worth a look as it emphasizes shareholder returns. The board of directors has authorized an additional $2 billion share buyback program. This stock is also a great pick for growth and value investors.

Apart from these heavy-weight stocks, the sector has seen sturdy performances by others. Alaska Air Group, Inc.’s (ALK) Q2 2015 earnings per share of $1.76 beat the Zacks Consensus Estimate of $1.73 and improved 56% from the year-ago earnings. Revenues grew 5% year over year and matched our estimates. It is a Zacks ETF Rank #2 (Buy) stock with a Growth and Value scores of ‘A’.

Though JetBlue Airways Corporation’s (JBLU) second-quarter 2015 earnings per share matched the Zacks Consensus Estimate and revenues missed the same, the top and bottom lines grew year over year. JBLU has a Zacks ETF Rank #2, Growth and Value scores of ‘A’ and a Momentum score of ‘B’.

How to Play?

By now, one must have realized that the underlying trend is solid in the airlines industry. So, investors might play the trend via basket approach to tap the entire potential of the space. And to
do so, what could be the best option other than JETS ETF (read: Inside the Flight of a New Airline ETF (JETS))?

The fund holds 33 stocks in its portfolio and is concentrated on a few individual securities, as it allocates about 70% to the top 10 holdings. United Continental (12.4%), Delta Airlines (12.33%), Southwest (12.23%) and American Airlines (11.04%) are the top four elements in the basket, with a combined share of about 45%. Other firms mentioned above also get places in the top 10 chart, each with over 4% weight. The product charges 60 bps in fees.

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US GLOBAL JETS (JETS): ETF Research Reports
 
UNITED CONT HLD (UAL): Free Stock Analysis Report
 
DELTA AIR LINES (DAL): Free Stock Analysis Report
 
SOUTHWEST AIR (LUV): Free Stock Analysis Report
 
AMER AIRLINES (AAL): Free Stock Analysis Report
 
ALASKA AIR GRP (ALK): Free Stock Analysis Report
 
JETBLUE AIRWAYS (JBLU): Free Stock Analysis Report
 
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