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Will Harvey Mar United Continental's (UAL) Q3 Earnings?

United Continental Holdings, Inc. UAL is scheduled to report its third-quarter earnings on Oct 18, after market closes.

Last quarter, the company delivered a positive earnings surprise of 1.10%. Moreover, the bottom line improved 5.36% on a year-over-year basis backed by operating revenue growth of 6.43%.

However, this Chicago-based carrier is likely to face turbulence in the third quarter. Evidently, multiple headwinds including the back-to-back hurricanes have hurt the entire space. 

Hurricane Harvey has hurt United Continental the most as Houston is the carrier’s second-largest hub. The negative sentiment surrounding the stock can be gauged from the fact that the Zacks Consensus Estimate for third-quarter earnings has decreased 15% over the last 30 days.

Consequently, the stock has struggled so far this year underperforming the Zacks Transportation-Airline industry on a year-to-date basis. Shares of United Continental have declined 8%, as against the industry’s rally of 16.4%.

Lets delve deep to find out the factors likely to impact United Continental’s third-quarter results.

More than 7,400 flights were cancelled at the George Bush Intercontinental Airport (IAH), with operations suspended at the airport due to the unprecedented storm for more than four days due to Harvey.

The carrier now anticipates third-quarter passenger revenue per available seat mile (PRASM: a key measure of unit revenue) to decrease between 3.5% and 4% on a year-over-year basis. The Zacks Consensus Estimate for third-quarter PRASM is pegged at 12.67 cents, much lower than 12.78 cents reported in the second quarter of 2017. Pre-tax margin for the third-quarter is projected between 10% and 10.5%.

Increased costs (fuel and labor) are expected to hurt the bottom line. Fuel price is forecasted to be $1.70 per gallon, higher than the Zacks Consensus Estimate of $1.62. Cost per available seat miles, excluding fuel, profit-sharing, third-party business expenses and other special items are estimated to vary between 2.5% and 3%. The company anticipates capacity to increase 3% year over year.

Apart from United Continental other carriers like Southwest Airlines LUV and American Airlines Group AAL are also likely to be hurt by the natural calamities.

What Does Our Model Say?

Our proven model too does not show conclusively that United Continental will beat earnings in third-quarter 2017. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) for this to happen. However, that is not the case as highlighted below.

Zacks ESP: United Continental has an Earnings ESP of +2.69% as both the Most Accurate estimate is 5 cents above the Zacks Consensus Estimate of $1.87 per share. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: United Continental’s Zacks Rank #5 (Strong Sell) acts as a spoiler. The bearish rank, combined with a negative Earnings ESP leaves the surprise prediction inconclusive.

Note that we caution against stocks with Zacks Ranks #4 or 5 (Sell-rated) going into an earnings announcement, especially when the company is seeing a negative estimate revision.

A Transportation Gem

With United Continental likely to disappoint, investors interested in the airline space may consider Hawaiian Holdings HA as our model shows that this company possesses the right combination of elements to post an earnings beat in its upcoming release.

Hawaiian Holdings has an Earnings ESP of +0.19% and a Zacks Rank #3. The company will report third-quarter results on Oct 19. You can see the complete list of today’s Zacks #1 Rank stocks here.

4 Stocks to Watch After the Massive Equifax Hack

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Southwest Airlines Company (LUV): Free Stock Analysis Report
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American Airlines Group, Inc. (AAL): Free Stock Analysis Report
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