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What's in Store for Southwest Airlines (LUV) in Q2 Earnings?

Southwest Airlines Co. LUV is scheduled to report second-quarter 2017 results on Jul 27, before the market opens.

In the first quarter, this low-cost carrier saw a negative earnings surprise of 1.61% owing to high labor costs. Operating revenues of $4,883 million marginally missed the Zacks Consensus Estimate of $4,894.1 million. Revenues, however, increased 1.2% on a year-over-year basis. Let’s see what awaits the stock in the second quarter.

Factors Likely at Play

We note that labor costs have spiked due to the recent labor deals inked by the company. This, in turn, is expected to hurt the bottom line in the second quarter as well similar to the previous quarter. In fact, Southwest Airlines expects CASM – excluding fuel and oil expenses, special items and profit sharing expenses – to increase approximately 6% in the to-be-reported quarter on a year-over-year basis.

Currently, labor deals are in vogue in the airline space. Not only Southwest Airlines, but other players in the space like United Continental Holdings UAL and Delta Air Lines DAL have signed deals with various labor groups over the last few months. Additionally, rising fuel costs might also limit bottom-line growth at Southwest Airlines in the quarter.

The company expects operating revenue per available seat miles (RASM) to increase in the band of 1% to 2%. In fact, we are optimistic about the company's efforts to enhance its shareholders’ wealth through dividends and share buybacks. Evidently, Southwest Airlines announced that its board of directors approved a new share repurchase program worth $2 billion.

Simultaneously, the company increased its quarterly dividend by 25%. We expect an update on this issue at the second-quarter conference call.

Earnings Whispers

Our quantitative model does not conclusively show an earnings beat for Southwest Airlines in this quarter. This is because a stock needs to have combination of two key ingredients – a positive Earnings ESP and a Zacks Rank #3 (Hold) or better – to increase its odds of an earnings surprise. However, this is not the case as highlighted below.

Zacks ESP: Southwest Airlines has an Earnings ESP of -1.67% as the Most Accurate estimate of $1.18 per share is pegged at 2 cents below the Zacks Consensus Estimate. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Southwest Airlines currently sports a Zacks Rank #1 (Strong Buy), which increases the predictive power of ESP. However, the company’s negative ESP makes surprise prediction difficult. You can see the complete list of today’s Zacks #1 Rank stocks here.

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

A Stock to Consider

With Southwest Airlines likely to disappoint, investors interested in the Airline sector may consider American Airlines Group, Inc. AAL, since our model shows that it possess the right combination of elements to post an earnings beat in its next release.

American Airlines has an Earnings ESP of +2.19% and a Zacks Rank #1. The company is slated to release its second-quarter 2017 results on Jul 28.

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Southwest Airlines Company (LUV): Free Stock Analysis Report
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United Continental Holdings, Inc. (UAL): Free Stock Analysis Report
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