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Can Southwest (LUV) Retain Its Beat Streak in Q4 Earnings?

Zacks Equity Research

Southwest Airlines Co. LUV is scheduled to report fourth-quarter 2019 results on Jan 23, before the market opens.

The Zacks Consensus Estimate for fourth-quarter earnings has been revised approximately 3% upward in the past 90 days. Moreover, the company flaunts an impressive earnings history, having outperformed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 9.9%.

Let’s see whether the company is able to repeat its beat streak in the fourth quarter as well.

Factors Likely at Play

Given the robust rise in air travel, strong demand for Southwest’s services is expected to have driven passenger revenues in the fourth quarter. As a result, passenger unit revenues (passenger revenue per available seat mile or PRASM) are anticipated to have got a boost. Notably, the Zacks Consensus Estimate for PRASM indicates a rise of 9 cents from the year-ago reported figure. The same for operating revenue per available seat mile (RASM) implies a 1.1% increase from that reported in the fourth quarter of 2018. The carrier anticipates RASM to have inched up to 2% year over year in the December quarter.

Additionally, modest fuel prices (as fuel expenses comprise a major chunk of airline expenditures) are likely to have lifted the bottom line. The Zacks Consensus Estimate for fuel price per gallon (inclusive of fuel tax: economic) indicates a 6.2% decline from the year-ago reported figure.

However, with the carrier’s fleet consisting of 34 Boeing 737 MAX aircraft, the airline’s quarterly performance is likely to have been hit by the extended grounding of the MAX jets. As has been the case in the first nine months of 2019, operating income is expected to have been affected in the fourth quarter as well due to the groundings.

Rising non-fuel unit costs due to lower capacity stemming from the MAX groundings is anticipated to have partly offset the bottom-line growth, arising from low fuel prices. Notably, the carrier predicts cost per available seat miles (CASM) excluding fuel and oil expense and profit-sharing expense to have increased 4-6% year over year in the fourth quarter. The consensus mark for CASM excluding fuel and oil expense, special items and profit-sharing expense implies a 4.5% rise from the year-ago reported figure. Further, with Southwest’s most fuel-efficient aircraft grounded, the carrier estimates fuel efficiency to have dipped 1-2% in the son-to-be-reported quarter.

Southwest Airlines Co. Price and EPS Surprise


Southwest Airlines Co. Price and EPS Surprise

Southwest Airlines Co. price-eps-surprise | Southwest Airlines Co. Quote

Earnings Whispers

The proven Zacks model predicts an earnings beat for Southwest in the fourth quarter of 2019 on the back of a perfect combination of the following two key ingredients: a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

Earnings ESP: Southwest has an Earnings ESP of +3.07% as the Most Accurate Estimate is pegged at $1.14, higher than the Zacks Consensus Estimate of $1.11. 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.

Highlights of Q3 Earnings

In the last reported quarter, Southwest delivered a positive earnings surprise of 12.8%. Moreover, the bottom line improved 13.9% year over year despite higher costs from the MAX groundings. Operating revenues, although inched up 1.2% year over year, lagged the Zacks Consensus Estimate.

Other Stocks to Consider

Investors interested in the broader Transportation sector may also consider Alaska Air Group, Inc. ALK, Canadian Pacific Railway Limited CP and Spirit Airlines, Inc. SAVE as these stocks too possess the right combination of elements to beat on earnings in their next releases.

Alaska Air Group has an Earnings ESP of +1.89% and a Zacks Rank of 3. The company will release fourth-quarter earnings numbers on Jan 28.

Canadian Pacific is a #3 Ranked player and has an Earnings ESP of +0.39%. The company will announce fourth-quarter financial numbers on Jan 29.

Spirit Airlines has an Earnings ESP of +8.23% and is Zacks #3 Ranked. The company is set to report fourth-quarter earnings on Feb 5.

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