Earnings Edge: Airlines Ready for Takeoff? AAL and LUV

Earnings Edge: Airlines Ready for Takeoff? AAL and LUV

When the pandemic landed, airlines were one of the hardest-hit industries.

Now that the country is almost opened back up, air travel has picked back up. From March 2020 to the end of the year, TSA checkpoints admitted one million people per day only 14 times. Nine of those days were in December.

Over the last 33 days, that number hasn’t dipped below the one million mark at all.

This monumental shift in traveling has us back on track to reach more than two million travelers per day later this year, which was about the average in 2019.

Even with this huge improvement in air travelers, airline stocks are still taking a beating.

Just last week, Delta Air Lines Inc. (NYSE: DAL), a giant in the industry, kicked off the quarter with a strong earnings report. Its revenues came in 7% better than expected, and it posted a smaller loss than analysts forecasted.

The result?

Shares dipped over 2% on the news, bringing its recent pullback to as much as 10%.

That type of price movement is not typical for an industry on the cusp of a massive rebound. With vaccines rolling out to pretty much anyone who wants one this year, we are closing in on a normalized economy. And that’s great news for airlines.

It’s where we are focusing our Earnings Edge this week.

I break down what you can expect from two airlines reporting this week: American Airlines Group (Nasdaq: AAL) and Southwest Airlines Co. (NYSE: LUV).

Let’s see which one holds the most potential with the economic recovery still in play.

Earnings Edge Stock No. 1: American Airlines Group

Earnings Announcement Date: April 22, before the open.

Expectations: Earnings at -$4.18 per share. Revenue at $4.01 billion.

Average Analyst Rating: Underperform.

I flew American Airlines to Nashville for New Year’s Eve. Our flight was packed — no empty seat on the way there or on the way back.

I know that was a holiday, but still. People are ready to go out again, and airlines will continue to see improvements in numbers.

Unlike many stocks in the S&P 500, American Airlines is still trading 25% below its pre-pandemic peak.

But, the bigger picture shows that the stock is down 65% since 2018. This tells us that American Airlines was struggling way before there was a global pandemic.

Every earnings report will be under the spotlight, not just for growth but for profitability and margins. And that was one of the key points in Delta’s first-quarter report. Delta mentioned the company turned cash-positive in March. It also expects to be at break-even in June and profitable in the third quarter.

It’s a refreshing take on a struggling business.

And it’s why American Airlines is worth a look here in April.

AAL Is Ready for Takeoff

American Airlines stock AAL

The stock is stuck in a clear uptrend that you can stay bullish in. As long as the stock holds above the green support line on the chart, you don’t want to bet against American Airlines.

According to the options market, traders are only betting on a 3.5% price move. If that happens to the downside, it could be the start of a major downtrend. But a jump of 3.5% to the upside still has it well off the recent peak. Shares need to rally 15% to get back to where it was trading last month.

Not a bad way to bet on a continued economic recovery.

Stock No. 2: Southwest Airlines

Earnings Announcement Date: April 22, before the open.

Expectations: Earning at -$1.87 per share. Revenue at $2.05 billion.

Average Analyst Rating: Outperform.

Southwest Airlines is a fantastic budget airline, and investors know it.

The stock is rated “outperform” from an average of 19 analysts that cover the stock, according to S&P Capital IQ.

But the stock has lagged the market in recent years, down 60% since 2018 and 25% from its pre-pandemic price.

Still, Southwest Airlines is my favorite stock in the airline space for one simple reason — its price chart.

LUV Inches Closer to Break Out

Southwest stock LUV

Shares are stuck in a rising wedge pattern. The red resistance line is climbing higher while the rising support line is climbing even faster. This wedge formation eventually leads to a breakout point, and earnings could be the key.

Investors are not that excited about airline stocks, as we saw with Delta’s latest report. It’s going to take a lot of great numbers to get over those concerns. A bullish outlook for LUV won’t do the trick.

That’s because it’s already priced in. The basic assumption is for things to improve.

Earnings need to show that things are improving quicker than expected to move the stock this week.

Options traders are only pricing in a 2.4% move this week. The stock hasn’t moved much in the last two weeks. The reason for that is a hesitation ahead of earnings. Investors are waiting to see what Southwest reports, then it could swing up or down by 5% or more easily.

I’m looking for a bigger move on earnings than the options market, but the trick is being right.

That’s why I don’t gamble on earnings. You never know what to expect.

Instead, I trade companies after the earnings report. By doing that, I can spot proven patterns in the stock that deliver consistent profits in a short period of time. You can learn all about what I call the “Ultimate Trading Strategy” in this special presentation.

Chad Shoop is a Chartered Market Technician and options expert for Banyan Hill Publishing. He is the editor of three leading newsletters: Quick Hit Profits, Automatic Profits Alert and Pure Income. His content is frequently published on Investopedia and Seeking Alpha. Check out his YouTube Channel to see his latest market insights.

Click here to join his free newsletter, Weekly Options Corner.

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