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Will Low Fuel Costs Drive United Continental (UAL) Earnings?

We expect Chicago, IL-based United Continental Holdings, Inc.UAL to report better-than-expected earnings when it unveils financial results for third-quarter 2015 on Oct 22, before market opens.

Last quarter, the company delivered a 0.61% positive earnings surprise. Let's see how things are shaping up for this announcement.

Why a Likely Positive Surprise?

Our proven model shows that United Continental is likely to beat earnings because it has the right combination of two key ingredients.

Zacks ESP : The Earnings ESP for the company is +1.56% as the Most Accurate estimate is $4.55 while the Zacks Consensus Estimate is pegged at $4.48. This serves as a meaningful and leading indicator of a likely positive earnings surprise.

Zacks Rank : United Continental currently has 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. Conversely, the 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 #2 and +1.56% ESP makes us reasonably confident of an earnings beat.

What is Driving the Better-Than-Expected Earnings?

United Continental boasts a solid earnings history, having delivered positive earnings surprises in each of the last four quarters, with an average beat of 3.88%. The company, along with peers such as Southwest Airlines Co. LUV , is benefiting considerably from persistent weak oil prices . United Continental's results in the third quarter of the year are, once again, likely to be positively impacted by low fuel costs.

Fuel costs account for a major chunk of an airline's operating expenses. Consequently, cheaper oil price should boost United Continental's bottom line in the quarter. The company projects average fuel price per gallon (inclusive of taxes, settled hedges etc.) for the third quarter at $1.97, which represents a significant reduction from the year-ago figure. Revenues, meanwhile, are expected to be pressurized by a strong dollar, once again, this quarter.

Additionally, we are impressed by United Continental's strong balance sheet. The carrier's efforts to enhance shareholder wealth through buybacks is encouraging.

For the third quarter of 2015, pre-tax margin is projected in the range of 16% to 17%. Moreover, consolidated capacity for the quarter is projected to grow at 2.1% on a year-over-year basis. Passenger revenue per available seat mile (PRASM) is expected to decline in the range of 5.5% to 6.0% in the third quarter. We expect a detailed update on the state of health of CEO Oscar Munoz who was hospitalized last week following a heart attack. Moreover, an update on the plans of the company to appoint an interim CEO is also expected on the call.

Other Stocks to Consider

United Continental is not the only carrier looking up this earnings season. The following airline stocks are also likely to beat earnings in the upcoming quarter:

Alaska Air Group, Inc. ALK , the parent company of Alaska Airlines, will unveil its third-quarter earnings numbers on Oct 22, before market opens. The company carries a Zacks Rank #2 and has an earnings ESP of +0.48%.

American Airlines Group AAL has an earnings ESP of +1.48% and a Zacks Rank #2. The company will report third-quarter results on Oct 23.

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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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