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Will Airline ETF Crash on Subdued Q3 or Take Off on Value?

The pure-play aviation ETF U.S. Global Jets ETF JETS lost about 4.7% in the last five days (as of Oct 27, 2017) on mixed earnings. Some recently released earnings couldn’t live up to investors’ expectations. Results were also hurt by the recent hurricanes. Below we highlight earnings in detail (see all Industrials ETFs here).

Q3 Results in Detail

Delta Air Lines Inc. DAL reported more than two weeks ago with a beat on both lines. Operating revenues of $11.06 billion surpassed the Zacks Consensus Estimate of $11.037 billion. Revenues increased 5.5% from the year-ago figure. The carrier’s third-quarter earnings (excluding 7 cents from non-recurring items) of $1.57 per share beat the Zacks Consensus Estimate of $1.54. Earnings, however, declined 7.6% on a year-over-year basis due to higher costs. The company has a Zacks Rank #5 (Strong Sell) and a VGM Score of C.

United Continental Holdings UAL reported better-than-expected results. Earnings (excluding 10 cents from non-recurring items) came in at $2.22 per share, beating the Zacks Consensus Estimate by 1.8%. Earnings were, however, 28.6% lower than the year-ago figure due to higher costs. Operating revenues of $9.878 billion were also marginally ahead of the Zacks Consensus Estimate of $9.857.3 billion. However, the top line shrunk 0.4% on a year-over-year basis. United Continental has a Zacks Rank #5 and a VGM Score of D.

Low cost carrier Southwest Airlines Co. LUV reported better-than-expected earnings but lower-than-expected revenues. The carrier’s earnings per share (excluding 4 cents from non-recurring items) of 88 cents beat the Zacks Consensus Estimate of 87 cents. The bottom line however, declined 5.4% on a year-over-year basis.

Operating revenues of $5.271 billion lagged the Zacks Consensus Estimate of $5.297 billion. The top line, however, improved 2.6% year over year. Zacks Rank #4 (Sell) LUV has a VGM Score of B.

American Airlines Group Inc.’s AAL third-quarter 2017 earnings (excluding 14 cents from non-recurring items) of $1.42 per share surpassed the Zacks Consensus Estimate by 3 cents. Quarterly earnings declined significantly on a year-over-year basis due to high costs. Revenues of $10.878 billion were 2.7% above the year-ago figure but slightly below the Zacks Consensus Estimate of $10.882.9 billion. The Zacks Ranked #5 American Airlines Group has a VGM Score of C.

Low-cost carrier JetBlue Airways Corporation’s JBLU third-quarter earnings of 55 cents per share beat the Zacks Consensus Estimate by 3 cents. Quarterly earnings, however, declined 5.2% from the year-ago figure due to higher costs. Operating revenues came in at $1.813 billion, just ahead of the Zacks Consensus Estimate of $1.809 billion. Revenues increased 4.7% from the year-ago figure. This Zacks Ranked #5 company has a VGM Score of B.

Alaska Air Group ALK reported earnings (excluding 10 cents from non-recurring items) of $2.24 per share, which fell short of the Zacks Consensus Estimate of $2.25. However, the bottom line inched up 1.8% on a year-over-year basis. Revenues came in at $2.120 billion, below the Zacks Consensus Estimate of $2.166 billion. The company has a Zacks Rank #5 and a VGM Score of A.

Is There Any Strong Positive?

By now, one must have understood from the beat ratios that corporate strength in the airlines industry is moderate. But investors should note that most of the stocks have a good Value Score of A or B. This makes the space a value play.  

However, oil prices play a crucial role in the airlines’ cost structure. If oil prices manage to see an uptrend in the coming days on an extension of the OPEC output curb deal, airlines may suffer on profit margins (read: Q3 Earnings to Drive Energy ETFs Higher).

Nevertheless, investors having a strong stomach for oil-related risks and faith in the compelling valuation of airline stocks, may play the recent dip in the space. Below we highlight the fund in detail (read: 5 Incredible ETFs & Stocks to Buy On the Dips):

JETS in Focus

The $112.4 million-fund holds more than 30 stocks in its portfolio and is concentrated on a few individual securities. Delta Airlines (12.43%), United Continental (12.03%), American Airlines (11.92%) and Southwest Airlines (11.6%) take the first four positions in the fund. JetBlue and Alaska Air hold the sixth and ninth positions in the fund with a 4.12% and 3.54% weight, respectively.

The product charges 60 bps in fees. The fund lost about 6.3% in the last 10 trading sessions (as of Oct 27, 2017) which saw the peak of airlines earnings’ releases. The fund has a Zacks ETF Rank #3 with a High-risk outlook.

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Southwest Airlines Company (LUV): Free Stock Analysis Report
 
JetBlue Airways Corporation (JBLU): Free Stock Analysis Report
 
Delta Air Lines, Inc. (DAL): Free Stock Analysis Report
 
United Continental Holdings, Inc. (UAL): Free Stock Analysis Report
 
American Airlines Group, Inc. (AAL): Free Stock Analysis Report
 
Alaska Air Group, Inc. (ALK): Free Stock Analysis Report
 
US GLOBAL JETS (JETS): ETF Research Reports
 
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