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Key Predictions for Q3 Earnings Reports of AAL, UPS & LUV

The Q3 earnings season is in full flow with earnings reports available from more than 135 S&P 500 companies. In fact the current week is an extremely busy one with 722 companies (including 180 S&P 500 players) slated to unveil their numbers during its course.

Per the latest Earnings Preview, stocks in the highly sought-after fraternity are projected to end Q3 with their top and bottom lines expanding 5% and 2.6%, respectively. In fact, seven of the 16 Zacks sectors are expected to witness their bottom line expand on a year-over-year basis.

Rough Ride for Transports in Q3?

The Zacks Transportation sector, does not share this rosy picture with the sectoral earnings projected to contract 14.9% due to higher costs and the recent hurricanes. In fact, the bottom line for key sectoral participants like Delta Air Lines DAL and United Continental Holdings UAL have contracted 7.6% and 28.6%, respectively, in Q3 on a year-over-year basis.

Notably, the unfavorable projection for this widely-diversified sector highlights the fact it has been one of the worst victims of the natural disasters (Harvey, Irma, Maria and the earthquake in Mexico). For example, airline operators had to cancel multiple flights leading to significant loss in revenues.

In fact, the negative impact of the hurricanes is also well reflected in the key transportation earnings reports available thus far. Evidently, United Continental Holdings had to cancel 8,300 flights in the quarter and consequently its third-quarter pretax income reduced to the tune of approximately $185 million.

Additionally, these catastrophes have hurt operations of railroads by damaging important rail lines, leading to rapid increase in freight costs. Also, the sluggishness of the automotive unit is a cause of concern for railroads. For trucking companies, shortage of drivers remains a major headwind. Meanwhile, the rise in labor costs has hurt J.B. Hunt Transport Services’ JBHT third-quarter results and the trend is likely to continue in the rest of Q3.

Stocks to Watch for Earnings on Oct 26

Given this backdrop, investors interested in the transportation space will keenly await Q3 reports from key sector participants like American Airlines Group AAL, United Parcel Service UPS and Southwest Airlines LUV that are scheduled for Oct 26.

According to our quantitative model, a company needs the right combination of two key ingredients — a positive Earnings ESPand a Zacks Rank #3 (Hold) or better — to increase the odds of an earnings surprise.

American Airlines Group, headquartered in Fort Worth, TX, operates more than 6,700 daily flights to over 330 destinations in more than 50 nations across the globe. Of late, this carrier also underwent a turbulent phase like the other airlines, mainly due to the hurricanes.

Consequently, the company called off approximately 8,000 flights in the third quarter. Also, increased costs (fuel and labor) are expected to hit the bottom line. The Zacks Consensus Estimate for third-quarter fuel price per gallon (including taxes) is pegged at $1.59, much higher than the $1.48 reported a year ago.

Despite the disruptions, the scenario with respect to total revenue per available seat mile (TRASM) is an improved one from the year-ago quarter, courtesy better-than-expected yields. For the third quarter, American Airlines expects total revenue per available seat mile (TRASM) to grow between 0.5% and 1.5%.  The Zacks Consensus Estimate for third-quarter TRASM is pegged at 14.98 cents, higher than 14.73 cents reported in the third quarter of 2016. The Zacks Consensus Estimate for third-quarter yields is pegged at 15.56 cents, higher than 15.27 cents reported in the third quarter of 2016.

However, the chances of this legacy carrier beating the Zacks Consensus Estimate in Q3 are less, even though it has an Earnings ESP of +0.53%. This is because American Airlines’ Zacks Rank #5 (Strong Sell) acts as a spoiler.

In fact, our model did not predict an earnings beat earlier as well. Previously, when we issued its Q3 earnings preview article, the company had an Earnings ESP of +1.41%, while the Zacks Rank remained the same. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

The next company United Parcel Service is the world's largest express carrier. Markedly, UPS provides specialized transportation and logistics services in the United States and internationally.

The Zacks Consensus Estimate for third-quarter U.S. Domestic Package revenues is pegged at $9,695 million, just below the figure of $9,745 million reported in the second quarter of 2017. The same for International Package revenues is pegged at $3,076 million, below the figure of $3,163 million reported in the second quarter of 2017. Also, high costs are likely to hurt the company’s bottom line in the to-be-reported quarter.

According to our proven model, the chances of the company beating the Zacks Consensus Estimate for earnings in this quarter are less, despite its Zacks Rank #3. This is because it has an Earnings ESP of -0.06% (read more: What's in the Cards for UPS Stock This Earnings Season?).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Its earnings performance apart, focus will be on the updates regarding its preparations for the upcoming holiday season. Additionally, growth in e-commerce is likely to benefit UPS.

Meanwhile, Southwest Airlines’ third-quarter results are expected to be hurt due to the recent hurricanes and the earthquake in Mexico. These natural disasters have forced the airline to cancel approximately 5,000 flights. Owing to the multiple flight cancellations, the company expects the quarters’ operating revenues to be hurt to the tune of $100 million.

Increased costs are expected to hurt the bottom line as well. Cost per available seat miles, excluding special items, is estimated to increase between 3% and 4%. Fuel price per gallon is anticipated between $2.00 and $2.05 in the quarter. The Zacks Consensus Estimate for third-quarter fuel price is pegged at $2.00 per gallon, higher than $1.93 reported in the second quarter of 2017.

According to our proven model, the chances of the company beating the Zacks Consensus Estimate for earnings in this quarter are less. This is because it has an Earnings ESP of -0.61% and carries a Zacks Rank #4 (Sell) (read more: Will Southwest Airlines Disappoint in Q3 Earnings?).

 

 

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Southwest Airlines Company (LUV): 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
 
J.B. Hunt Transport Services, Inc. (JBHT): Free Stock Analysis Report
 
United Parcel Service, Inc. (UPS): Free Stock Analysis Report
 
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