The Zacks Analyst Blog Highlights: Alaska Air Group, American Airlines Group, Allegiant Travel and Spirit Airlines
For Immediate Release
Chicago, IL – January 20, 2016 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include Alaska Air Group (ALK), American Airlines Group (AAL), Allegiant Travel Company (ALGT) and Spirit Airlines (SAVE).
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Here are highlights from Tuesday’s Analyst Blog:
4 Airlines Set for Impressive Q4 Earnings Numbers on Weak Oil
The weakness in oil prices, prevalent through the whole of 2015, benefited airline stocks greatly helping them register significant bottom-line growth. Operating expenses of airline companies have gone down considerably owing to the steep fall in fuel expenses – one of the major input costs for an airline. This has naturally resulted in huge savings for carriers.
Apart from American Airlines Group, which does not hedge fuel costs, carriers like Delta Air Lines, which has restructured its fuel hedge portfolio in the wake of the soft fuel price environment, too have been huge beneficiaries of plunging oil prices.
Strengthened Balance sheets Prompt Rise in Shareholder Friendly Activities
With low oil prices significantly bolstering the balance sheets of most carriers, it is quite natural that stocks in the high-flying airline space are looking to return a part of their massive profits to shareholders through dividend payments and buyback activities.
During the first three quarters of 2015, we have seen industry heavyweights like Delta Air Lines and Southwest Airlines hiking their dividend payouts. The airline space has also seen a surge in share buybacks. For example, on their third quarter conference call, the board of directors at American Airlines authorized an additional $2 billion share repurchase program, which is expected to be completed by Dec 31, 2016. We expect carriers to provide additional updates on their shareholder friendly activities on their respective fourth quarter conference calls as well.
Dividend hikes and the surge in buyback activities apart, carriers have also taken advantage of the soft oil price scenario to reduce their debt levels. The decision to invest substantially toward enhancing the flying experience can also be seen as a direct consequence of airlines being in the pink of financial health.
Some Headwinds to Watch Out For
Although airline companies saw their bottom line enjoying the fruits of cheaper crude, top-line growth stumbled due to certain headwinds plaguing the aviation space.
Worries related to a key revenue metric – passenger revenue per available seat mile (PRASM) – have concerned carriers for quite some time now. Apart from a strengthening U.S. dollar, lower fuel surcharges on international flights due to soft oil prices have also pressurized this key metric that is a measure of sales relative to capacity for a carrier.
For example, United Continental recently announced that it expects its fourth quarter PRASM to decline in the band of 5.75% to 6.25% on a consolidated basis (the earlier projection had called for a decline in the 4% to 6% range). American Airlines predicts PRASM for the fourth quarter to decline in the band of 5% to 7%. That carriers would struggle on the revenue front in the fourth quarter as well can be gauged from the Zacks Earning Trends report which suggests that the S&P 500 stocks in the transportation sector, of which airlines are a part, would increase a mere 0.7% in the final quarter of 2015, on a year-over-year basis. Capacity and pricing woes have also been hitting airline stocks hard for quite some time now.
Apart from commentaries on PRASM and capacity on their fourth quarter conference calls, we keenly await the impact (if any) of the deadly Paris attacks on the carriers’ fourth quarter results. Following the Nov 2015 attacks, the U.S. State Department had issued a global travel alert for U.S. citizens. The alert is valid through Feb 24, 2016. United Continental has primarily blamed the dastardly attacks for its bearish PRASM view (stated above).
Airlines to Fly High in Q4 Courtesy Oil Despite Challenges
Despite the abovementioned headwinds, we believe that the upcoming fourth quarter earnings season in the airlines space is set to witness a strong bottom-line performance, in line with the preceding quarters of 2015. Thanks, once again, to the dip in oil prices.
Oversupply resulted in oil prices trading well below the $50 per barrel mark for the entire fourth quarter. The Dec 2015 decision of the Organization of the Petroleum Exporting Countries (OPEC) – an international cartel of oil producers – to not cut oil production, has pushed oil prices below the $30 per barrel mark. This means further good news for carriers, given the inverse relation between oil prices and the health of aviation stocks.
4 Likely Airline Superstars of Q4
With weak oil likely to make the closing quarter of 2015 a stellar one yet again for airline stocks, particularly with respect to the bottom line, we believe it would be prudent to zero in on some stocks in the space that are likely to report higher-than-expected earnings in the fourth quarter. More often than not, a positive earnings surprise delivered by a company sees its stock price skyrocketing.
However, the task of selecting the right stock for higher returns is by no means an easy one, given the vastness of the industry participants. The process is akin to searching for ‘a needle in a haystack’ unless one is aware of an appropriate method to arrive at the right choice.
One sure-shot way to success is picking stocks that have the combination of a favorable Zacks Rank – Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) – and a positiveEarnings ESP. Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising with their upcoming earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.
With the aid of the above methodology, we hereby pin point four airline stocks that look likely to beat the Zacks Consensus Estimate in the fourth quarter of 2015.
Our first choice would be Alaska Air Group (ALK) – the parent company of Alaska Airlines. The Seattle, WA-based company, sporting a Zacks Rank #1, has an earnings ESP of +0.70%. The Zacks Consensus Estimate of earnings for the fourth quarter is pegged at $1.43 per share.
It is worth noting that the company has registered positive earnings surprises in each of the last four quarters, with an average beat of 2.45%. The combination of a favorable Zacks Rank and a positive earnings ESP makes us confident of an earnings beat from this carrier in the fourth quarter as well, results of which will be revealed on Jan 21, before the commencement of trading.
Our next choice would be American Airlines Group ( AAL), based in Fort Worth, TX. This Zacks Rank #1 stock has an earnings ESP of +1.55%. The Zacks Consensus Estimate for fourth-quarter earnings is $1.94. Notably, the company has registered positive earnings surprises in each of the last four quarters, with an average beat of 1.36%. The carrier will report its fourth-quarter results on Jan 29, before the commencement of trading.
Allegiant Travel Company (ALGT), based in Las Vegas, NV, also features in our current list of favorites, by virtue of its Zacks Rank #3 and an earnings ESP of +0.64%. The Zacks Consensus Estimate for the fourth quarter is pegged at $3.15.
The parent company of Allegiant Airlines, which will reveal its fourth-quarter results on Jan 27 after the close of trading, has registered positive earnings surprises in each of the last four quarters, with an average beat of 9.18%. The favorable combination sported by the company makes us confident of an earnings beat from Allegiant Travel, this time as well.
Low-cost carrier Spirit Airlines (SAVE) rounds off our list of airline stocks that are likely to deliver higher-than-expected earnings in the final quarter of 2015. This Miramar, FL-based Zacks Rank #3 company has an earnings ESP of +2.50%. The Zacks Consensus Estimate for the fourth quarter is pegged at $0.80.
The carrier, which delivered positive earnings surprises in three of the last four quarters, with an average beat of 2.84%, is expected to reveal its fourth-quarter results on Feb 9.
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ALASKA AIR GRP (ALK): Free Stock Analysis Report
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