Markets

American Airlines (AAL) Q4 Earnings: Is a Beat in Store?

American Airlines GroupAAL is scheduled to unveil fourth-quarter 2016 results on Jan 27, before the market opens.

In the third quarter, the carrier had delivered a positive earnings surprise of 66.7%. The results were aided by low fuel costs. Quarterly earnings also increased 1% year over year. Quarterly revenues of $10,594 million were 1.1% below the year-ago figure, but edged past the Zacks Consensus Estimate of $10,549 million.

The American Airlines stock has gained over 15% since the third-quarter earnings beat. The stock has outpaced the Zacks categorized Transportation-Airline industry in the last three months. The stock returned 18.3% compared with the industry's gain of 15.8% over the same period.

The optimism regarding the stock ahead of its fourth-quarter earnings release can be gauged by 16.9% increase in the Zacks Consensus Estimate over the last month.

In fact, the company has an impressive history with respect to earnings per share. It surpassed the Zacks Consensus Estimate in each of the last four quarters with an average beat of 20.48%. We expect American Airlines to keep up the impressive trend and top the Zacks Consensus Estimate for the fourth quarter as well. Our quantitative model too shows that the company is likely to beat earnings because it has the perfect combination of two key ingredients.

Zacks ESP: The Earnings ESP for American Airlines is +1.11% with the Most Accurate estimate exceeding the Zacks Consensus Estimate of 90 cents per share by a penny. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Zacks Rank: American Airlines carries a Zacks Rank #2 (Buy). Note that stocks with a Zacks Rank #1 (Strong Buy), 2 or 3 (Hold) have a significantly higher chance of beating earnings estimates. Conversely, the Sell-rated stocks (Zacks Rank #4 or 5) should never be considered while going into an earnings announcement.

The combination of American Airlines' favorable Zacks Rank and a positive ESP makes us reasonably confident of earnings beat.

What is Driving the Better-than-Expected Earnings?

American Airlines recently unveiled a bullish guidance for the fourth-quarter total revenue per available seat mile (TRASM: a key measure of unit revenues). The carrier now expects the metric to be flat at 2% on a year-over-year basis, in the final quarter of 2016. The view represents a marked improvement from the guidance issued last month, when it expected the metric in the band of 1% decline to an increase of 1%. We expect American Airlines 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.

The improved view was due to "improving yields." The company also raised its guidance for pre-tax margin, excluding special items, on the basis of higher yields. Pre-tax margin for the fourth quarter is now expected in the band of 7-9% compared with the prior guidance range of 6-8%.

However, the bottom line 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: mainline ) - excluding fuel and special items - to increase in the band of 9% to 11% in the final quarter of 2016.

We are impressed by the company's efforts to reward shareholders through share buybacks and dividend payments. During the third quarter, the company returned $669 million billion to shareholders through dividends of $53 million and share buyback worth $616 million. The carrier has returned more than $9 billion to stockholders through share repurchases and dividends since mid-2014.

Other Stocks to Consider

Apart from American Airlines, investors who are interested in the airline space may also consider the following stocks. This is because our model shows that these companies too possess the right combination of elements to post an earnings beat this quarter.

JetBlue Airways Corp.JBLU has a Zacks Rank #3 and an Earnings ESP of +2.04%. The company is scheduled to report fourth-quarter results on Jan 26. The company beat the Zacks Consensus Estimate in three of the last four quarters with an average positive surprise of 6.49%.

Southwest Airlines Co.LUV carries a Zacks Rank #2 and an Earnings ESP of +1.47%. The company is scheduled to report fourth-quarter results on Jan 26. The company beat the Zacks Consensus Estimate in two of the last four quarters with an average positive surprise of 2%.

You can see the complete list of today's Zacks #1 Rank stocks here.

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Southwest Airlines Company (LUV): Free Stock Analysis Report

JetBlue Airways Corporation (JBLU): Free Stock Analysis Report

Delta Air Lines, Inc. (DAL): Free Stock Analysis Report

American Airlines Group, Inc. (AAL): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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