We expect Chicago-based United Continental Holdings, Inc. UAL to report better-than-expected earnings in the third quarter of 2016. The carrier will release its results on Oct 17, after market closes.
In the second quarter, the carrier had reported a positive earnings surprise of 1.56%. The earnings beat was mainly due to a conservative Zacks Consensus Estimate for the second quarter ($2.57 per share which happened to be much lower than the second-quarter 2015 figure of $3.29). Revenues also beat expectations but declined year over year.
The United Continental stock has gained over 10% since the second-quarter earnings beat. The optimism regarding the stock ahead of its third-quarter earnings release can be gauged by the 4.2% increase in the Zacks Consensus Estimate over the last month.
Our quantitative model shows that United Continental is likely to beat earnings because it has the perfect combination of two key ingredients.
Zacks ESP:The Earnings ESP for United Continental is +1.01% with the Most Accurate estimate exceeding the Zacks Consensus Estimate of $2.98 per share by 3 cents.
Zacks Rank:United Continental carries a Zacks Rank #3 (Hold). Note that stocks with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 have a significantly higher chance of beating earnings estimates. Conversely, Sell-rated stocks (Zacks Rank #4 or 5) should never be considered going into an earnings announcement.
The combination of United Continental’s Zacks Rank #3 and a positive ESP makes us reasonably confident of an earnings beat.
What is Driving the Better-than-Expected Earnings?
The carrier has an impressive track record with respect to earnings per share. United Continental outpaced the Zacks Consensus Estimate in three of the last four quarters with an average beat of 1.41%.
The carrier has seen quite a few positive developments in the third quarter, including the appointment of Scott Kirby as the president – a newly created position at the carrier. Kirby, who joined United Continental Holdings from American Airlines Group AAL, has vast experience in the airline space and his appointment is a prudent move by United Continental to turn around its fortunes.
We are also positive on the U.S. Department of Transportation’s decision to grant final approval to eight carriers, including United Continental, to initiate commercial flights to Havana. We believe that, once operational, United Continental's top line will be benefitted immensely by the new route additions as Havana is a favorite tourist spot. We expect a detailed commentary on the issue at the third-quarter conference call.
We are also positive on United Continental's efforts to reward its shareholders. Moreover, its constant efforts to expand and modernize its fleet are encouraging. Moreover, the bottom-line performance in the third quarter is likely to be aided by low fuel costs. The company expects fuel price (inclusive of all cash settled hedges) to be $1.52 per gallon, well below the year-ago figure.
Though the company continues to face difficulties in terms of top-line growth, we are encouraged by the improved third-quarter forecast for passenger revenue per available seat mile (PRASM: a key measure of unit revenue). The carrier now expects the metric to decline in the band of 5.5–6% as against the previous guidance of a decline in the band of 5.5–7.5%.
In view of these bullish developments and the positive sentiment surrounding the stock currently, United Continental is expected to report outperform on the earnings front on Oct 17, just like Delta Air Lines DAL did on Oct 14.
Another Stock to Consider
Investors interested in the airline space may also consider Alaska Air Group ALK, as our model shows that it has the right combination for an earnings beat this quarter.
The Seattle, WA-based carrier has an Earnings ESP of +0.49% and carries a Zacks Rank #3. The carrier, which has seen the Zacks Consensus Estimate for the third quarter increase 1% to $2.03 per share over the last month, is scheduled to unveil its third-quarter results on Oct 20. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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