Market Overview

Earnings Season Could Test Airline ETF

Earnings Season Could Test Airline ETF

Delta Air Lines Inc. (NYSE: DAL), the second-largest U.S. airline, steps into the earnings confessional this morning with Wall Street expecting earnings per share of $1.53 on revenue of just over $11 billion. Delta's ability to meet or exceed analysts' estimates could be a sign of things to come for rival carriers and the US Global Jets ETF (NYSE: JETS).

To be fair, JETS, the only exchange-traded fund dedicated to airline stocks, is in rallying mode as airlines enter earnings season. The ETF is up sharply off the September lows brought on by Hurricanes Harvey and Irma and is higher by 9.5 percent over the past month.

That is good news because analysts expect those storms to be challenges for airline earnings. Delta has already warned to that effect and analysts believe similar pressures will be seen with rival carriers.

All About The Weather

Delta “last week warned investors that Hurricane Irma cost it $120 million and trimmed its operating margin forecast to a range of 15.5 percent to 16.5 percent, from its estimate in July of a margin as high as 20 percent for the third quarter,” reports CNBC.

Atlanta-based Delta is the second-largest holding in JETS at a weight of 12.5 percent, just behind the 12.8 percent the ETF allocates to American Airlines Group Inc. (NASDAQ: AAL). United Continental Holdings Inc. (NYSE: UAL) and Southwest Airlines Co. (NYSE: LUV) combine for 24 percent of the ETF's roster.

Delta is not alone in being a potential thorn in the side of JETS this earnings season. Analysts are not thrilled with United as “forecasts showed a 36 percent year-over-year decline to $1.99 a share for United Continental Holdings, which reports Oct. 18, while July-September profits at American Airlines will likely come in 24 percent lower than the year-earlier quarter at $1.34 a share, according to analysts,” according to CNBC.

Not Too Worried

Even with those forecasts, investors do not appear too worried. All four of the top four holdings in JETS surged Tuesday with a couple gaining more than 4 percent apiece. Following Tuesday's 0.6 percent gain, Texas-based Southwest is up 17 percent year-to-date, making the best-performing member of the big four in JETS.

JETS is now up 14.2 percent year-to-date, ahead of the 10 percent gained by the Dow Jones Transportation Average.

Based on price-to-book and price-to-earnings ratios, JETS trades at noticeable discounts to the Dow Jones Transportation Average. Airlines account for 20 percent of that transportation benchmark.

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