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3 Airline Stocks to Buy Post UAL, DAL's Strong Q1 Reports

Maharathi Basu
Updated
CWCO vs. GWRS: Which Stock Should Value Investors Buy Now?
CWCO vs. GWRS: Which Stock Is the Better Value Option?

The Q1 earnings season for the airline space has taken off on a positive note. Two airline majors — United Continental Holdings, Inc. UAL and Delta Air Lines, Inc. DAL — that have reported thus far have outperformed with respect to revenues as well as earnings per share.

Contrasting Price Performances

We note that Delta kick-started the earnings season for airlines on Apr 12. Prior to that, the Zacks Airline sector had lost 6.8% of its value. However, since Apr 12, the loss is only 0.2%. The reduction in loss clearly highlights the improvement in the fortunes of airlines.


 


 

Zacks Industry Rank also Highlights Improvement


The improving scenario for the airline space is well reflected by the Zacks Industry Rank #108 carried by the 28-member Zacks Airline Industry. Notably, the favorable rank places the industry in the top 44% of the 250+ groups. The current positioning of the industry is much more favorable than a rank of 187 carried a week ago.

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We put our entire 250-plus industries into two groups: the top half (i.e., industries with the best average Zacks Rank) and the bottom half (the industries with the worst average Zacks Rank).

Over the last 10 years, using a one week rebalance, the top half outpaced the bottom half by a factor of more than 2 to 1.

Click here to know more: About Zacks Industry Rank

Catalysts to Improvement

Last week, Delta’s stock surged following its impressive earnings report. The company’s earnings (excluding 3 cents from non-recurring items) of 74 cents per share surpassed the Zacks Consensus Estimate by a penny. Operating revenues came in at $9,968 million, outpacing the Zacks Consensus Estimate of $9,881.2 million. The top line increased 8.9% from the year-ago figure. Strong demand for air travel boosted revenues.

In the quarter under review, passenger revenues, cargo revenues and others increased 7%, 23% and 32%, respectively, on a year-over-year basis, to boost the top line. The company's performance with respect to unit revenues was also encouraging in the quarter. Delta's unit revenue guidance for the second quarter is also impressive.

Adding to the bullish scenario, the Chicago-based United Continental unveiled an extremely impressive earnings report on Apr 17. The company’s earnings (excluding 2 cents from non-recurring items) of 50 cents surpassed the Zacks Consensus Estimate of 49 cents. Moreover, the bottom line climbed 25% year over year owing to higher revenues.

Operating revenues of $9,032 million in the first quarter were also ahead of the Zacks Consensus Estimate of $9,012.5 million. Moreover, the top line increased 7.3% year over year. Strong demand apart, increased ticket prices also boosted results.

Like Delta, United Continental too performed extremely well on the unit revenue front, with passenger revenue per available seat mile improving 2.7%. The company’s decision to trim its capacity growth guidance for the current-year also found favor with investors. Consequently, the stock gained 4.8% on Apr 18.

We note that capacity-related fears had plagued airline stocks ever since United Continental guided on Jan 23 that capacity growth is expected between 4% and 6% year over year. Following the guidance, investors feared that similar actions might be taken by rivals, triggering a price war.

However, the carrier’s current decision to trim its expectations pertaining to this year’s capacity growth between 4.5% and 5.5% lays to rest the above fears. Naturally, the report not only led to an upsurge in United Continental’s stock price on Apr 18, but also those of fellow-airline players like American Airlines Group Inc. AAL. With most sector participants having a field day, it was no surprise that the sector tracker — NYSE ARCA Airline index — increased 2.4% to $116.36 on Apr 18.

More Airline Outperformances in Store?

With two airline majors having outperformed, it seems that confidence of investors has been restored in the airline sector, as indicated by the strong price performances. We expect most other airline players to follow suit and deliver impressive numbers in the current reporting cycle.

Our optimism is backed by improved first-quarter unit revenue forecasts recently unveiled by key players like American Airlines and JetBlue Airways Corporation JBLU. American Airlines expects total revenue per available seat mile (TRASM: a key measure of unit revenues) to increase between 3% and 4% year over year in the soon to-be-reported quarter (previous guidance anticipated the metric to grow in the 2-4% band).

JetBlue expects revenue per available seat mile (RASM) to increase approximately 6.1% year over year (previous guidance anticipated the metric to grow in the 3.5-5.5% band).

3 Airline Picks

In view of the tailwinds mentioned above, we believe that it is prudent to add airline stocks to one’s portfolio now. However, with multiple carriers present, the task of selecting the right ones for handsome returns is not an easy one. In fact, identifying a winning stock is akin to searching for a needle in a haystack for an investor, in the absence of proper guidance.

This is where the Zacks Rank, which justifies a company's strong fundamentals, can come in really handy. Markedly, the Zacks Rank is a reliable tool that helps investors to trade with confidence regardless of their trading style and risk tolerance. To learn more about how you can use this proven system for market-beating gains, visit  Zacks Rank Education.

Based on a favorable Zacks Rank (#1 or 2), we have zeroed in on three airline stocks that should be present in one’s portfolio for handsome returns.

SkyWest, Inc. SKYW is the holding company for two scheduled passenger airline operations and an aircraft leasing company. The stock carries a Zack Rank #2 (Buy) and has a market capitalization of $2.91 billion. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Over the last 90 days, the company has seen the Zacks Consensus Estimate for current-year earnings being revised 6.5% upward. Moreover, the company has a VGM Score of B. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score.

Gol Linhas Aereas Inteligentes S.A. GOL is a low-cost and low-fare carrier, headquartered in Sao Paulo, Brazil. The company has a market capitalization of $2.22 billion and carries a Zacks Rank #2.

For the current year, the company has seen the Zacks Consensus Estimate for earnings being revised 25.5% upward over the last 90 days. Increased demand for air travel on the back of an improving Brazilian economy should drive the company’s growth.

Azul S.A. AZUL is the largest airline in Brazil based on the number of cities and departures. Azul, which went public last year, sports a Zacks Rank #1 and has a market capitalization of $10.4 billion.

The company has seen the Zacks Consensus Estimate for current-year earnings being revised 6.3% upward over the last 60 days.

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JetBlue Airways Corporation (JBLU) : Free Stock Analysis Report
 
Gol Linhas Aereas Inteligentes S.A. (GOL) : Free Stock Analysis Report
 
Delta Air Lines, Inc. (DAL) : Free Stock Analysis Report
 
United Continental Holdings, Inc. (UAL) : Free Stock Analysis Report
 
SkyWest, Inc. (SKYW) : Free Stock Analysis Report
 
American Airlines Group Inc. (AAL) : Free Stock Analysis Report
 
AZUL SA (AZUL) : Free Stock Analysis Report
 
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