Southwest hasn’t exactly had a stellar performance record so far this year and so of it can be attributed to the cancellations because of the hurricanes this year. They’re about to release their earnings report for the third quarter in a couple days and the expectations are some what muted.
Southwest Airlines Co. (LUV) is scheduled to report third-quarter 2017 results on Oct 26, before the market opens.
In the second quarter of 2017, the carrier’s earnings per share (on an adjusted basis) of $1.24 surpassed the Zacks Consensus Estimate of $1.20. The bottom line also improved 4.2% on a year-over-year basis. Operating revenues of $5,744 million was marginally above the Zacks Consensus Estimate of $5,733.2 million.
However, this Dallas-based low-cost carrier is likely to face turbulence in the to-be-reported quarter. The company’s third-quarter results are expected to be hurt due to the recent hurricanes (Harvey, Irma and Maria) and the earthquake in Mexico. These natural disasters have forced the airline to cancel approximately 5,000 flights. Markedly, the negative sentiment surrounding the stock can be gauged from the fact that the Zacks Consensus Estimate for third-quarter earnings has moved down 22.3% over the last 90 days.
Consequently, the stock has struggled so far this year underperforming the Zacks Airline industry over the last six months. Shares of Southwest Airlines have gained 5.1% compared with the industry’s rally of 5.9%.
Let’s delve deep to find out the factors likely to impact Southwest Airlines’ third-quarter results.
Owing to the multiple flight cancellations, the company expects third-quarter operating revenues are likely to be hurt to the tune of $100 million. Moreover, the carrier expects operating revenue per available seat mile (RASM) in the quarter to be flat to down 1% year over year. The Zacks Consensus
Estimate for third-quarter passenger unit revenues is pegged at 12.33 cents, lower than 13.03 cents reported in the second quarter of 2017.
Increased costs (fuel and labor) are expected to hurt the bottom line. Cost per available seat miles, excluding special items, is estimated to increase between 3% and 4%. Fuel price per gallon is anticipated between $2.00 and $2.05 in the quarter. The Zacks Consensus Estimate for third-quarter fuel price is pegged at $2.00 per gallon, higher than $1.93 reported in the second quarter of 2017.
Apart from Southwest Airlines other carriers like American Airlines Group (AAL – Free Report) and JetBlue Airways (JBLU – Free Report) are also likely to be hurt by the natural calamities.
We are, however, appreciative of the company’s efforts to enhance its shareholders‘ wealth through dividends and share buybacks. At its annual meeting of shareholders, Southwest Airlines announced that its board of directors approved a new share repurchase program worth $2 billion. Notably, share repurchases benefit a company’s earnings per share by lowering outstanding share count.
What Does Our Model Say?
Our quantitative model does not conclusively show an earnings beat for Southwest Airlines in this quarter. This is because a stock needs to have combination of two key ingredients – a positive Earnings ESP and a Zacks Rank #3 (Hold) or better – to increase its odds of an earnings surprise. However, this is not the case as highlighted below.
Zacks ESP: Southwest Airlines has an Earnings ESP of -0.61%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Zacks Rank: Southwest Airlines’ Zacks Rank #4 (Sell).
We caution against stocks with a Zacks Rank #4 or 5 (Strong Sell) going into the earnings announcement, especially when the company is seeing negative estimate revisions.
A Transportation Gem
With Southwest Airlines likely to disappoint, investors interested in the broader transportation sector may consider Norfolk Southern Corporation (NSC – Free Report) as our model shows that it possesses the right combination of elements to post an earnings beat in the current reporting cycle.
Norfolk Southern has an Earnings ESP of +0.59% and a Zacks Rank #3. The company is slated to release its third-quarter 2017 results on Oct 25.