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Will High Costs Hurt United Continental's (UAL) Q2 Earnings?

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United Continental Holdings, Inc. UAL is scheduled to report second-quarter 2018 results on Jul 17, after the market closes.

Last reported quarter, the company delivered a positive earnings surprise of 2%. Both earnings and revenues surpassed estimates and increased year over year. Strong demand for air travel boosted results.

However, with rising oil prices having engulfed the entire airline industry, the prospects for United Continental seem dismal in the second quarter.

Let’s look into the factors rendering such an outlook.

Factors Likely at Play

High fuel prices are a major concern for the company in the period to be reported. Crude oil prices are currently hovering at around $70 a barrel. As fuel costs comprise a major chunk of airline expense, such high costs push up operating expenses, hampering bottom-line growth in turn. The metric is expected in the range of $2.18-$2.23 per gallon for the second quarter, much higher than $1.63 reported a year ago. The Zacks Consensus Estimate for the same stands at $2.22.

Bedsides fuel costs, expenses pertaining to labor are also likely to hit the bottom line in the second quarter. The carrier expects unit costs (excluding fuel, profit sharing & third party business costs) to rise in the band of flat to 1% year over year in the second quarter.
 
The company’s high leverage further adds to its woes. Its current long-term debt-to-equity (expressed as a percentage) is well over 100. This compares unfavorably with its industry average of 92.6% as well as the S&P 500 index’s tally of 81.4%.

However, robust growth in passenger revenues on account of strong demand for air travel is anticipated to aid the company’s top line in the second quarter. The company estimates passenger unit revenues to inch up 1-3% year over year. The Zacks Consensus Estimate for second-quarter passenger unit revenues is pegged at 12.77 cents, above 11.67 cents reported a year ago.

Earnings Whispers

Our quantitative model does not conclusively show that United Continental is likely to beat on earnings this quarter. Per the proven model, a company needs the right combination of two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or better — to increase the odds of an earnings surprise. However, that is not the case as highlighted below.

Zacks ESP: United Continental has an Earnings ESP of -0.70%, representing the difference between the Most Accurate estimate and the Zacks Consensus Estimate. The Most Accurate Estimate is pegged at $3.05 per share, lower than the Zacks Consensus Estimate of $3.07. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: United Continental carries a Zacks Rank #3 (Hold), which increases the predictive power of ESP. However, the company’s negative ESP leaves surprise prediction inconclusive.

We caution against all Sell-rated stocks (#4 or 5) going into an earnings announcement, especially when the company is seeing negative estimate revisions.

United Continental Holdings, Inc. Price and EPS Surprise

 

United Continental Holdings, Inc. Price and EPS Surprise | United Continental Holdings, Inc. Quote


Stocks to Consider

Investors interested in the broader Transportation sector may consider United Parcel Service, Inc. UPS, Union Pacific Corporation UNP and J.B. Hunt Transport Services, Inc. JBHT as these stocks possess the right combination of elements to beat estimates in their next releases.

UPS has an Earnings ESP of +1.34% and a Zacks Rank of 3. The company will report second-quarter earnings on Jul 25.

Union Pacific has an Earnings ESP of +1.02% and is a Zacks #3 Ranked stock. The company is scheduled to release second-quarter financial figures on Jul 19.

J.B. Hunt has an Earnings ESP of +0.55% and a Zacks Rank #2 (Buy). The company will announce second-quarter earnings numbers on Jul 16. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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