It is a well-documented fact that the airline industry is passing through a rough phase being confronted with multiple headwinds ranging from the surge in terror attacks, Brexit induced uncertainty, technological glitches, declining unit revenues and plunging airfares to name a few. The sorry state of affairs at this sector can be gauged by the Zacks Industry rank of 184 (out of 260+ groups) currently carried by the Transportation-Airline segment.
With the industry passing through turbulent times, it is no surprise that Buy-rated stocks are hard to find in the space. Currently, Latin American carrier Copa Holdings CPA is only stock in the industry that sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Why Copa Holdings Is Flying High
Copa Holdings is currently the only ray of hope for investors in the otherwise gloomy space. The Panama City-based carrier has been an impressive performer this year, with its shares surging more than 84% on a year-to-date basis.
The carrier has an impressive earnings history. It outpaced the Zacks Consensus Estimate in three of the last four quarters with an average beat of 37.04%.
The carrier posted stellar results in the second quarter of 2016, outperforming both earnings and revenue estimates. The carrier’s second-quarter earnings (on an adjusted basis) of 51 cents per share were well above the Zacks Consensus Estimate of 23 cents. The better-than-expected earnings were supported by low fuel costs. Quarterly revenues of $494 million also beat the Zacks Consensus Estimate of $483 million.
Passenger traffic (on a consolidated basis) grew 6.2%. Load factor (percent of seats filled by passengers) expanded 490 basis points to 78.3% as traffic expanded while capacity contracted.
Earnings Estimates Rise
The carrier’s strong second-quarter results have naturally resulted in upward revisions in its earnings per share (EPS) estimates for the third quarter. The Zacks Consensus Estimate for the third quarter has increased 27 cents over the last 60 days to $1.14.
We note that the Zacks Consensus Estimate for the third quarter is 34% higher than Copa Holdings’ EPS of 85 cents reported in the third quarter of 2015. The recently completed Rio Olympics, which resulted in a surge of tourists visiting the country, are expected to boost third-quarter results for this Latin American carrier.
The Zacks Consensus Estimate for full-year 2016 is also on the rise and currently stands at $4.45 per share (up 66 cents over the last two months).
Impressive Expansion Efforts
We are encouraged by the carrier’s efforts to expand its operations. In July, the carrier added the third new destination this year as it launched flights to Rosario, Argentina. The carrier, which exited the second quarter with a fleet of over 100 planes, took delivery of one Boeing 737-800 aircraft during the quarter.
The carrier’s efforts to reward its shareholders through dividend payments are also encouraging. Copa Holdings' quarterly dividend of 51 cents per share ($2.04 on an annualized basis) currently yields 2.3%. The carrier paid its dividend for the third quarter on Sep 15. The past records bear evidence of Copa Holdings’ stable dividend payment history.
Oil Still a Benefactor
We note that Copa Holdings’ second-quarter earnings were aided by low fuel costs. Average fuel price per gallon plunged 21.3% to $1.81, thereby boosting the company’s bottom line. It is not only this Latin American carrier which is reaping the benefits of cheap oil. Other sector participants have also benefitted immensely from cheap oil.
The second quarter saw airline heavyweights like Delta Air Lines, Inc. DAL, American Airlines Group Inc. AAL and United Continental Holdings, Inc. UAL reporting better-than-expected earnings per share on the back of cheap oil.
Cheap oil has aided the bottom line of carriers significantly through huge savings. This has strengthened the carriers’ balance sheets, allowing them to increase investments to improve flying experience for passengers. Also, these companies were able to hike dividend payouts/buybacks along with engaging in profit sharing payments.
Although oil prices have been weak for quite some time (since mid-2014), this major tailwind continues to be the main factor behind the considerable year-over-year earnings growth for carriers. Currently, oil prices are hovering around the $44 a barrel mark, much lower than the above $100 a barrel level witnessed two years ago. The bullish forecast by the International Air Transport Association for the airlines industry for 2016 is also driven by the assumption of oil prices remaining weak.
Moreover, the recent decision by the U.S. Transportation Department to grant final approval eight U.S.-based carriers to initiate commercial flights to the Cuban capital of Havana is a positive. The carriers that have gained the final approval are Delta Air Lines , American Airlines Group, United Continental Holdings, JetBlue Airways Corp. JBLU, Spirit Airlines, Southwest Airlines Co. LUV, Alaska Air Group ALK and Frontier Airlines. The flights, once operational, should boost top-line growth the carriers’ as Havana is a favorite tourist spot.
In view of the above-mentioned factors, we can safely say that although the airline space is volatile at present, the sector has potential to bounce back on the strength of its solid fundamentals. Moreover, oil prices are not anticipated to touch the highs of mid-2014 anytime soon and hence, we expect this factor continue to aid carriers’ earnings going forward. However, only time will tell whether the sector will able to recover and to what extent.
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