Southwest Airlines (LUV) Q2 Earnings: Disappointment In Store?

Low-cost carrier Southwest Airlines Co. (NYSE:LUV) is set to release second-quarter 2016 results, before the market opens on Jul 21.

In the first quarter of 2016, the carrier had reported better-than-expected earnings. Results were aided by low fuel costs. However, with airline stocks struggling due to multiple headwinds and Southwest Airlines being no exception, an earnings beat might not be possible this time for the Dallas, TX-based carrier.

Our quantitative model also doesn’t point to an earnings beat this time too. Here’s why:

Southwest Airlines doesn’t have the right combination of the two key ingredients – positive Earnings ESP and a Zacks Rank #3 (Hold) or better – for increasing the odds of an earnings beat.

Zacks ESP: The Earnings ESP for Southwest Airlines is +0.82%. This is because the Most Accurate estimate of $1.23 is above the Zacks Consensus Estimate of $1.22 per share.

Zacks Rank: Southwest Airlines carries a Zacks Rank #5 (Strong Sell). Please note that we caution against stocks with a Zacks Rank #4 and 5 going into the earnings announcement, especially when the company is seeing negative estimate revisions as is the case with Southwest Airlines. The Zacks Consensus Estimate for the second quarter has gone down by 3 cents to $1.22 per share over the last 60 days.

Looking at the fundamentals, here are the factors that should be at play:

Shares of Southwest Airlines have declined over 8% in the past three months as multiple concerns ranging from the surge in terror attacks and the Brexit vote hurt the airline industry. We expect the carrier’s second quarter earnings to be hurt by the above headwinds.

The company had said last month that it expects a key revenue figure- operating revenue per available seat mile (RASM: a key measure of unit revenue)-to increase marginally (less than 1%) in the second quarter. The view was reaffirmed recently while releasing its June traffic numbers. The carrier’s announcement that it intends to delay the delivery of 67 new Boeing (NYSE:BA) 737 Max jets by almost six years to manage capital spending also hurt the shares.

However, the company's policy of rewarding shareholders through dividend payouts/buybacks continues to impress. Moreover, we are also positive on the approval gained by the carrier to fly to Cuba. We expect an update on the issues on the second quarter conference call.

Stocks That Warrant a Look

Here are a few transportation stocks that you may want to consider, as our model shows that these have the right combination for an earnings beat this time around:

United Parcel Service (NYSE:UPS) with an earnings ESP of +2.11% and a Zacks Rank #2 (Buy). The company will report second-quarter earnings on Jul 29.

Expeditors International of Washington (NASDAQ:EXPD) with an earnings ESP of +3.45% and a Zacks Rank #3. The company is slated to report second-quarter earnings on Aug 2.

Genesee & Wyoming (NYSE:GWR) with an earnings ESP of +1.28% and a Zacks Rank #3. The company is scheduled to report second-quarter earnings on Aug 1.