|United and 4 Other Airlines Report Earnings This Week. Here's What to Expect. -- Barrons.com|
|Dow Jones Newswires April 19, 2021 05:59:00 AM ET |
March may have been the tipping point for airlines to get back to operating profits. Travel is recovering as vaccinations increase, flights are getting packed, and the days of bargain-basement fares may be fast receding.
Those trends have made the sector a winning bet this year: The NYSE Arca Airline Index is up about 26% versus an 11.5% gain for the S&P 500.
But investors are now looking ahead to summer bookings, and it may take some upbeat forecasts to push the stocks up even more.
We'll find out more about the industry's financial health and outlook this week as five carriers report first- quarter results, following on Delta Air Lines' (ticker: DAL) release last week.
United Airlines Holdings (UAL) kicks off the week with first-quarter results due Monday after the close. United already issued preliminary figures, saying it expects revenues of $3.2 billion in the quarter, down 66% from the first quarter of 2019. That revenue figure fell short of Wall Street's forecasts, though United made progress on turning a corner to profitability, saying it turned cash-positive in March.
The airline is expected to rack up a pretax loss of $2.8 billion and a loss of $7.05 in adjusted earnings per share in the quarter.
If United's stock follows in the path of Delta, however, it could sell off. While Delta's first-quarter results largely met Wall Street forecasts, its outlook was weaker than anticipated, pulling its stock down 2.8% the day it released earnings.
Delta also indicated the recovery is being fueled by leisure travel, while business and international fares remain down more than 80% from pre-pandemic levels. That is pressuring the airline's unit economics, including its revenue yields per flight. Without higher-margin business and international fares, total revenue may take longer to recover and operating margins may stay weak. United is also a full-service carrier that may face similar struggles.
Wall Street is now focusing on pricing as a lever for the stocks. "We believe domestic traffic is back, but pricing is lagging, and we want to know how they are thinking about raising fares through the summer," wrote Cowen analyst Helane Becker in a note on Friday.
The other big carrier on tap is American Airlines Group (AAL), slated to report results on Thursday before the market opens.
American has also primed Wall Street with preliminary figures, expecting revenue to be down 62% from the first quarter of 2019, at the midpoint of its prior forecasts. The company projected a net loss of $2.7 billion to $2.8 billion (excluding tax credits and other benefits of about $2 billion, mainly from Cares Act funding). And it forecast a net loss of $4.29 to $4.41 a share, excluding special credits, compared with consensus forecasts for a loss of $4.23.
American will need to deliver a healthy outlook to move its stock up, following a 76% gain over the last six months. That may be getting tougher, considering its reliance on international routes. American's operating expenses include much higher interest expenses, and its share count has been heavily diluted through equity issuance.
Morgan Stanley analyst Ravi Shanker, for instance, sees the stock trading down to $20, from recent prices around $ 22. "We believe AAL stock will rise with the industry tide of returning air traffic and we like its young aircraft fleet which could limit capex pressure in the critical years ahead," he wrote in a note last week. "However, with the stock up over 50% YTD, positioning is no longer skewed as negative as it used to be, which raises the bar."
The last three airlines slated to report are Southwest Airlines (LUV), Spirit Airlines (SAVE), and Alaska Air Group (ALK), all scheduled for Thursday.
The trio largely focus on the domestic leisure market and should be seeing some of the biggest revenue recoveries. None have warned that results will fall short of forecasts. Alaska issued a largely positive early read on the quarter.
Wall Street expects Southwest to post revenues of $2.1 billion and a pretax loss of $1.3 billion. The carrier is forecast to post an adjusted loss of $1.86 a share.
Southwest should benefit from getting its Boeing (BA) MAX planes back into service and an increase in corporate bookings now that it has joined a global booking system. The airline's domestic network is also in the sweet spot of the recovery, notes Shanker. The analyst raised his price target on the stock to $80, implying gains of nearly 30% from recent prices around $62.
The challenge with Southwest's stock is valuation, though. It's trading at 20 times 2022 earnings and 13 times estimated 2023 earnings, at the higher end of industry averages.
Spirit should be in position to meet or beat forecasts: It's an ultra-low-cost carrier oriented to domestic leisure and vacation travel. Wall Street is looking for revenue of $459 million and a pretax loss of $329 million. Adjusted earnings are forecast at a loss of $2.67 per share.
Yet Spirit's stock has soared so much -- up 128% in the last six months -- that it may be getting tougher to lift it from here. Raymond James' Savanthi Syth increased her 2021 EPS estimates slightly last week, for instance, but maintained a Market Perform rating on the shares.
"We believe Spirit is exposed to markets seeing strong demand and fare recovery heading into 2Q21," she wrote. But the airline is also shouldering higher interest expenses and has issued equity, diluting earnings per share. And since Spirit already had a lean cost structure heading into the downturn, it hasn't been able to generate as much savings as other carriers.
Alaska Air, for its part, has primed investors to expect a positive quarter. The airline said in a filing last week that it sees revenue down 33% from the January 2019 quarter, in line with its prior forecast. It expects passenger revenues to be down 55%, matching the higher end of its prior forecast, and it is expecting cash flow from operations of $150 million, beating its prior forecast for $50 to $100 million.
The big hurdle for Alaska's investors may be the shares' run-up. The stock is up 76% in the last six months to recent prices around $69. Wall Street's average price target is $83. That's an attainable goal, though investors may need to stay seated for a while.
Write to Daren Fonda at firstname.lastname@example.org