We expect Chicago-based, United Continental Holdings, Inc. UAL to report better-than-expected earnings in the fourth quarter of 2016. The carrier will release its results on Jan 17, after the market closes.
In the third quarter, the carrier reported a positive earnings surprise of 1.97%. The earnings beat was mainly due to a conservative Zacks Consensus Estimate for the third quarter ($3.05 per share which happened to be much lower than the third-quarter 2015 figure of $4.49). Revenues also beat expectations.
The United Continental stock has gained over 37% since the third-quarter earnings beat. The stock has comfortably outpaced the Zacks categorized Transportation-Airline industry over the last three months. The stock gained 37.83% compared with the industry, which advanced just 20% over the same period.
The optimism regarding the stock ahead of its fourth-quarter earnings release can be gauged by the 4.8% 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 +10.61% with the Most Accurate estimate exceeding the Zacks Consensus Estimate of $1.32 per share by 14 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 1.68%.
United Continental recently unveiled a bullish guidance with respect to passenger unit revenues for the final quarter of 2016. Owing to better-than-expected close-in bookings and yields, the company now expects passenger unit revenues (a measure of sales relative to capacity for a carrier) for the fourth quarter to decline in the band of 1.25–1.75%, on a year-over-year basis. The view represents a marked improvement from the earlier guidance, when the metric was expected to decline in the band of 3–4%. We expect United Continental to come out with a further improved view on unit revenues for the first quarter, just as Delta Air Lines DAL did on Jan 12.
United Continental now expects pre-tax margin (adjusted) for the fourth quarter in the range of 9.25% to 9.75% (previous guidance with respect to the metric was in the band of 7.5% to 8.5%).
The bottom-line, however, is likely to be impacted by higher costs due to the recent labor deals inked by the company. Consequently, the carrier expects consolidated unit cost per available seat mile (CASM) – excluding fuel, profit sharing and third-party expenses – to increase in the band of 4% to 4.25 % in the quarter.
We are also positive on the commencement of flights to Havana by the carrier. The carrier has made many managerial changes of late in a bid to improve its operational performance. We are impressed by United Continental's efforts to reward its shareholders. During the third quarter of 2016, the company returned $255 million to shareholders by repurchasing 5.2 million shares. The carrier has returned $2.4 billion to shareholders in the first nine months of 2016. Currently, the company has $2 billion remaining under its existing share repurchase program.
Stocks to Consider
Investors interested in the transportation space may consider the following stocks as our model shows they possess the right combination of elements to post an earnings beat this quarter.
American Airlines Group AAL has an Earnings ESP of +5% and a Zacks Rank #3. The company, which will release its fourth-quarter results on Jan 27, has an impressive history with respect to earnings per share. The company beat the Zacks Consensus Estimate in each of the last four quarters with an average positive surprise of 20.48%. You can see the complete list of today’s Zacks #1 Rank stocks here.
CSX Corp. CSX has an Earnings ESP of +4.08% and a Zacks Rank #3. The company, which will release its fourth-quarter results on Jan 17, has an impressive history with respect to earnings per share. The company beat the Zacks Consensus Estimate in three of the last four quarters with an average positive surprise of 4.46%.
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