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Will High Operating Costs Ail Southwest (LUV) Q1 Earnings?

Zacks Equity Research

Southwest Airlines Co. LUV is slated to release first-quarter 2019 results on Apr 25, before the market opens.

In the last reported quarter, the company delivered a positive surprise of 10.4%. Quarterly revenues also outpaced the Zacks Consensus Estimate. Results were aided by stronger revenues, higher yields and better cost management.

However, things do not look up for the company this quarter with the Zacks Consensus Estimate for first-quarter earnings being revised 29.9% downward in the last 60 days.

Factors at Play

Southwest anticipates a negative revenue impact of nearly $150 million in the first quarter on account of low demand and yields following the 35-day government shutdown, bad weather conditions, maintenance disruptions while negotiating the labor deal with the AMFA and the MAX 8 groundings.

Additionally, the carrier is likely to struggle on the unit revenue front in the quarter due to flight cancellations from the unscheduled maintenance disruptions and a sluggish demand scenario. For the first quarter, operating revenue per ASM (RASM) is expected to inch up 2-3% year over year. Notably, the company’s guidance was trimmed twice in the first quarter. The Zacks Consensus Estimate for RASM in the first quarter stands at 13.69 cents, lower than 14.13 cents reported in the fourth quarter of 2018.

Moreover, high costs might hamper the company’s bottom-line growth. The large number of flight cancellations induced an approximate 3-point year-over-year rise in the first-quarter unit costs excluding fuel and oil expense and profit-sharing expenses. Consequently, non-fuel unit costs are projected to escalate around 10% in the quarter under review. Also, the new labor pact with AMFA will add approximately $30 million to salaries, wages and benefits costs in the first quarter.

However, strong passenger revenues owing to solid travel demand are anticipated to partly offset the adverse revenue impact. The Zacks Consensus Estimate for passenger revenues in the first quarter stands at $4,818 million compared with $4,585 million reported in the year-ago period.

Southwest Airlines Co. Price and EPS Surprise


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

Earnings Whispers

Per our proven modela 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 here as highlighted below.

Earnings ESP: Southwest has an Earnings ESP of 0.00% as both the Most Accurate Estimate and the Zacks Consensus Estimate are pegged at 61 cents. 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 of 3, which increases the predictive power of ESP. However, the company’s 0.00% ESP makes 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.

Stocks to Consider

Investors interested in the broader Transportation sector may consider C.H. Robinson Worldwide, Inc. CHRW, SkyWest, Inc. SKYW and Werner Enterprises, Inc. WERN as these stocks possess the perfect combination of elements to beat on earnings in the next releases.

C.H. Robinson has an Earnings ESP of +0.22% and is a Zacks #3 Ranked player. The company will release first-quarter earnings numbers on Apr 30.

SkyWest has an Earnings ESP of +0.83% and a Zacks Rank #2 (Buy). The company is scheduled to announce first-quarter results on Apr 25. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Werner has an Earnings ESP of +2.06% and is a #3 Ranked player. The company is set to report first-quarter financial figures on Apr 25.

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Southwest Airlines Co. (LUV) : Free Stock Analysis Report
SkyWest, Inc. (SKYW) : Free Stock Analysis Report
C.H. Robinson Worldwide, Inc. (CHRW) : Free Stock Analysis Report
Werner Enterprises, Inc. (WERN) : Free Stock Analysis Report
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