Airline Profits: Is It Worth Buying?

We have a slew of earnings reports this week as different parts of the economy are represented. So far, we’ve seen second-quarter results from a fair few S&P 500 companies, with earnings for those index members up 8.7% on 5.2% higher revenue.

The overall earnings picture is expected to remain positive, supported by continued strong performance from the technology sector.

There are a couple of airlines on the list this week, namely American Airlines AAL and Southwest Airlines LUV. Both stocks are down YTD, with American Airlines’ decline being much more pronounced.

Image Source: Zacks Investment Research

We can use the recent results from a similar study, United Airlines UAL, as a little guide. Let’s take a closer look at what investors can expect from this pair.

United Airlines beats earnings per share expectations

United Airlines beat Zacks Consensus EPS estimates but missed sales expectations by a small margin, and the stock saw a mildly positive reaction to the results. Earnings fell 18% year over year, while sales rose nearly 6%.

Results reflected continued consumer demand for travel, with UAL carrying its highest number of passengers in its history during the second quarter. Capacity increased 8.3% compared to the same period last year, and the company also recorded a record number of passengers carried in a single day, with 565,000.

It was a decent quarter for the company, and the stock has been riding a positive ride since then. Still, analysts lowered their earnings expectations for UAL’s current fiscal year following the release, as seen below.

Image Source: Zacks Investment Research

While recent stock market results have been positive, analyst forecast revisions following the earnings announcement certainly raise questions about the sustainability of this trend.

Southwest & American Airlines

Both Southwest and American Airlines have seen negative earnings estimate revisions for their respective releases, with both expecting lower earnings compared to the year-ago periods. In fact, Southwest currently has a Zacks Rank #4 (Sell), while American Airlines currently has a Zacks Rank #5 (Strong Sell).

Southwest Airlines Changes Overview –

Image Source: Zacks Investment Research

American Airlines Changes Overview –

Image Source: Zacks Investment Research

The negative revisions paint a murky near-term picture for each stock’s performance, partially explaining its weak YTD performance. However, it’s worth noting that favorable guidance could spark positive earnings estimate revisions, which would support post-earnings positivity.

Is it worth buying?

While United Airlines UAL saw some positivity following its quarterly earnings release, the negative revisions that followed warrant some scrutiny. United’s results reflected continued strength in consumer travel, although the company’s profitability was significantly impacted.

Both Southwest Airlines LUV and American Airlines AAL saw negative earnings estimate revisions following United’s release, which is not a positive development. Given their unclear earnings pictures, investors should stay away and instead focus on stocks enjoying positive earnings estimate revisions.

Want the latest recommendations from Zacks Investment Research? Today you can download the 7 best stocks for the next 30 days. Click to get this free report