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Is a Beat in the Cards for Southwest (LUV) in Q4 Earnings?

Zacks Equity Research

Southwest Airlines Co. LUV is slated to release fourth-quarter 2018 earnings numbers on Jan 24, before the market opens.

Last reported quarter, the company delivered a positive surprise of 1.9%.  Moreover, the bottom line improved 22.7% on a year-over-year basis despite higher fuel prices. Operating revenues too outpaced the Zacks Consensus Estimate. Additionally, the top line rose year over year. Results were aided by stronger passenger revenues.

Our proven model shows that Southwest is likely to beat on earnings this reporting cycle as well, courtesy of a perfect combination of the following two key ingredients:

Earnings ESP: Southwest has an Earnings ESP of +3.40%, representing the difference between the Most Accurate Estimate, which stands at $1.09 and the Zacks Consensus Estimate, pegged lower at $1.05. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Southwest carries a Zacks Rank #3 (Hold). Notably, stocks with a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 alongside a positive ESP have significantly higher chances of beating estimates. Thus, the above combination raises the odds of a likely earnings surprise for this stock.

Conversely, Sell-rated stocks (#4 or 5) should never be considered going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Southwest Airlines Co. Price and EPS Surprise

 

Southwest Airlines Co. Price and EPS Surprise | Southwest Airlines Co. Quote


Factors Likely at Play

Strong travel demand is anticipated to boost the carrier’s passenger revenues, which in turn, is likely to aid the top line. The Zacks Consensus Estimate for fourth-quarter passenger revenues stands at $5,281 million compared with $4,738 million in the year-ago period. The same for passenger revenue per available seat mile (PRASM) is pegged at 13.11 cents, higher than 12.50 cents in the fourth quarter of 2017.

Additionally, the airline’s projection for fourth-quarter revenue per available seat miles (RASM: a key measure of unit revenues) is encouraging given that the company struggled with the April mid-air flight horror for a considerable period of time. It envisions RASM to inch up in the 1-2% band year over year during the final quarter of 2018.

Even after several months since the fatal fight incident, the company does not seem to have fully recovered, evident from its declining load factors (percentage of seats filled by passengers) in 2018 ever since the incident. Load factor being a key indicator denoting the company’s profitability position, its successive contraction might partly affect results in the impending quarterly release.

Moreover, although the carrier has trimmed its fuel cost forecast for the quarter to be reported owing to modest price levels, the estimate still remains pretty high in terms of a year-over-year comparison. The company lowered its fuel costs expectation to $2.25-$2.30 from the earlier range of $2.30-$2.35 per gallon. The prediction, however, is much higher than $2.09 in the prior-year period. The Zacks Consensus Estimate for the same is pegged at $2.29 per gallon. This rise in fuel cost might limit bottom-line growth.

Other Stocks to Consider

Investors interested in the broader Transportation sector may also look into some other stocks worth considering like ArcBest Corporation ARCB, Expeditors International of Washington, Inc. EXPD and Allegiant Travel Company ALGT as these possess the right mix of elements to beat on earnings in the next releases.

ArcBest has an Earnings ESP of +4.78% and a Zacks Rank #2.  The company will report fourth-quarter financial figures on Jan 30.

Expeditors has an Earnings ESP of +0.39% and a Zacks Rank of 1. The company will announce fourth-quarter results on Feb 19. You can see the complete list of today’s Zacks #1 Rank stocks here.

Allegiant has an Earnings ESP of +2.35% and a Zacks Rank of 2. The company is scheduled to release fourth-quarter earnings numbers on Jan 30.

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