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Will Cheap Oil Drive United Continental (UAL) Q1 Earnings?

We expect Chicago-based United Continental Holdings, Inc. UAL to report better-than-expected earnings in the first quarter of 2016. The carrier will release its results on Apr 20, after market close.

In the fourth quarter of 2015, the carrier had reported a negative earnings surprise of 1.93%. Results were hurt by soft sales.

However, an earnings beat doesn’t look very difficult for United Continental in the first quarter, as the Zacks Consensus Estimate is pretty conservative at $1.17, thanks to the drastic downward revision in earnings estimates following the company’s lackluster fourth-quarter results.  

Our quantitative model also points at an earnings beat. Here’s why:

United Continental has the right combination of two key ingredients – positive Earnings ESP and a Zacks Rank #3 (Hold) or better – for increasing the odds of an earnings surprise.

Zacks ESP: The Earnings ESP for United Continental is +0.86% with the Most Accurate estimate exceeding the Zacks Consensus Estimate by a penny.

Zacks Rank: United Continental carries a Zacks Rank #3 (Hold). The combination of United Continental’s Zacks Rank #3 and +0.86% ESP makes us reasonably confident of an earnings beat.

What is Driving the Better-than-Expected Earnings?

Despite the earnings miss in the final quarter of 2015, the carrier has an impressive history with respect to earnings, having outshined the Zacks Consensus Estimate in three of the last four quarters. The average earnings beat for the company stands at 1.84%.

Cheap oil has been the main reason behind the strong bottom-line performance. We expect oil to boost results in the first quarter as well. The company expects fuel price (inclusive of all cash settled hedges) to be $1.37 per gallon, well below the year-ago figure. While conservative EPS estimates coupled with low fuel costs may well secure an earnings beat, top-line issues will be reflected in the first quarter of 2016 results.

United Continental, like other key airline players, has been grappling with issues related to passenger revenue per available seat mile (PRASM: a key measure of unit revenue) for quite some time now and the first quarter is likely to be no different. United Continental expects PRASM in the first quarter to decline in the band of 7.25% to 7.75% due to a strong U.S. dollar, lower surcharges, reduced travel plans mainly by energy dependent corporate customers and weak domestic yields.

Moreover, we expect an update on the challenges facing the management of the carrier. The company is facing a revolt from some of its shareholders. Hedge funds PAR Capital Management, Inc. and Altimeter Capital Management, L.P, who collectively have a 7.1% stake in the company, are apparently dissatisfied by the company’s performance and have expressed their lack of faith in the current leadership by announcing their intention to nominate six candidates to the company’s board at its 2016 annual meeting of shareholders.

Moreover, the company is likely to provide an outlook for the second quarter apart from updates on its fleet as well as dividend/buyback activities on the conference call. With so much to look forward to, investors will no doubt keenly await the carrier’s first-quarter earnings report.

Other Stocks to Consider

Here are some other companies in the broad transportation sector you may want to consider as our model shows they have the right combination of elements to post an earnings beat this quarter:

Canadian Pacific Railway Limited CP with an earnings ESP of +1.11% and a Zacks Rank #1. The company will report results on Apr 20.

Canadian National Railway Company CNI with an earnings ESP of +1.47% and a Zacks Rank #1. The company is slated to release its results on Apr 25.

Kansas City Southern KSU with an earnings ESP of +1.04% and a Zacks Rank #3. The company is scheduled to report results on Apr 19.

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KANSAS CITY SOU (KSU): Free Stock Analysis Report
 
CDN NATL RY CO (CNI): Free Stock Analysis Report
 
CDN PAC RLWY (CP): Free Stock Analysis Report
 
UNITED CONT HLD (UAL): Free Stock Analysis Report
 
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