Why The Airline ETF May Fly Low Despite Decent Earnings

The pure-play aviation ETF U.S. Global Jets ETF JETS lost about 0.8% in one month (as of Feb 23, 2018)despite reporting mixed-to-upbeat earnings. The space has a top Zacks Industry Rank (top 42%). Investors still seem cautious about investing in it.

Let's delve a little deeper into the earnings results and the concerns associated with airline stocks. 

Q4 Results in Detail

Delta Air Lines Inc.'s DAL fourth-quarter earnings (excluding 16 cents from non-recurring items) of 96 cents per share beat the Zacks Consensus Estimate of 88 cents. Moreover, the bottom line expanded 17.1% on a year-over-year basis aided by higher revenues. Operating revenues came in at $10,245 million, surpassing the Zacks Consensus Estimate of $10,158.8 million. The top line increased 8.3% from the year-ago figure. The stock has a Zacks Rank #2 (Buy) with a VGM (Value, Growth, Momentum) Score of B (read: ETFs & Stocks to Gain on Record Thanksgiving Travel).

United Continental Holdings UAL reported better-than-expected earnings and revenues in the fourth quarter of 2017. Earnings (excluding 59 cents from non-recurring items) came in at $1.40 per share, beating the Zacks Consensus Estimate of $1.34. The bottom line was, however, 21.4% lower than the year-ago figure due to higher costs. Operating revenues of $9,438 million (up 4.3% year over year) were also ahead of the Zacks Consensus Estimate of $9,427.9 million.

Low cost carrier Southwest Airlines' LUV earnings per share (excluding $2.41 from non-recurring items) of 77 cents beat the Zacks Consensus Estimate of 76 cents. The bottom line also increased 4.1% on a year-over-year basis. Operating revenues of $5,274 million surpassed the Zacks Consensus Estimate of $5,242.1 million. Also, the top line improved 3.9% year over year.

American Airlines Group Inc.'s AAL fourth-quarter 2017 earnings (excluding 41 cents from non-recurring items) of 95 cents per share surpassed the Zacks Consensus Estimate by 3 cents. Quarterly earnings increased 3% on a year-over-year basis despite higher costs. Revenues of $10,600 million were up 8.3% year over year and beat the Zacks Consensus Estimate of $10,581.1 million.

Low-cost carrier JetBlue Airways Corporation's JBLU fourth-quarter earnings per share (excluding $1.76 from non-recurring items) of 32 cents fell short of the Zacks Consensus Estimate of 34 cents. The bottom line decreased 36% on a year-over-year basis due to high costs. Operating revenues of $1,756 million matched the Zacks Consensus Estimate. Revenues increased 7% from the year-ago figure.

Alaska Air Group Inc. ALK reported fourth-quarter 2017 earnings (excluding $2.14 from non-recurring items) of 83 cents, meeting the Zacks Consensus Estimate. The bottom line plunged 46.79% on a year-over-year basis. Revenues came in at $1,962 million, marginally above the Zacks Consensus Estimate of $1,961.8 million. The top line also improved 28.7% on a year-over-year basis.

Wall of Worry

As per an article published on Wall Street Journal, most leading global airlinesannounced greater-than-anticipated expansion plans lately. Several operators also indicated a rise in costs. Plus, fuel price is no longer as low as it was two years back. As per analysts, "a combination of low fuel prices, control of costs, and restrained growth" led leading airlines to score solid earnings in recent times. Now, the gradual retreat of those very factors may bring about pain in the space.

Nevertheless, investors having a strong stomach for oil-related risks and faith in the compelling valuation of airline stocks, may still play the space. Below we highlight the fund in detail.

JETS in Focus

The $93.8 million-fund holds more than 30 stocks in its portfolio and is concentrated on a few individual securities. American Airlines (12.29%), United Continental (12.15%), Delta Airlines (11.49%), Southwest Airlines (10.65%), and take the first four positions in the fund. JetBlue and Alaska Air hold the seventh and tenth positions in the fund with a 3.81% and 3.51% weight, respectively. The product charges 60 bps in fees.

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