The Zacks Analyst Blog Highlights: United Continental Holdings, Southwest Airlines, Spirit Airlines, Yelp and Facebook

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Aug 20, 2014, 09:30 ET

CHICAGO, Aug. 20, 2014 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include the United Continental Holdings Inc. (NYSE:UAL-Free Report), Southwest Airlines Co. (NYSE:LUV-Free Report), Spirit Airlines Inc. (Nasdaq:SAVE-Free Report), Yelp Inc. (NYSE:YELP-Free Report) and Facebook (Nasdaq:FB-Free Report).

Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.

Here are highlights from Tuesday's Analyst Blog:

Airlines Take Off on Cheaper Oil: 3 Stock Picks

Times have got increasingly better for airline companies as Brent crude oil hit a new 14 month low on easing supply concerns. Notably, falling crude oil prices indicate lower jet fuel costs, thereby boosting the profitability of airline companies.

On Monday, the Brent crude oil price fell by $1.93 to $101.60 while the West Texas Intermediate (WTI) crude oil slipped 94 cents to $96.41 at the end of the day as Libya accelerates its oil production and supply concerns over conflict in Iraq and Ukraine eases. The declining oil prices drove most of the airline stocks on Monday's trading session. Notably, United Continental Holdings (up 4%), American Airlines Group (up 3.75%) and Southwest Airlines (up 3.6%) were some of the major gainers.

Drop in Crude Price: A Blessing

The profit outlook of airline stocks depends largely on fuel prices, the major variable component in the industry. According to the International Air Transport Association (IATA) total fuel cost for aviation companies will touch $212 billion in 2014 accounting for almost 30% of the overall operating cost.

Hedging strategies are frequently used by airline companies to cope with rising fuel prices. The carriers use a combination of calls, swaps and collars at varying WTI crude-equivalent price levels to hedge. However, the passenger carrier's, which have cut their oil hedges will benefit most from the falling price trend.

Strong Q2 Earnings

The airline sector had witnessed a soft first quarter due to severe winter. However, the second quarter earnings have looked much more promising as the current momentum in the macro economy was complemented by strong fundamentals within the sector.

Most of the traditional and regional U.S. carriers have managed to beat our second quarter 2014 earnings estimate with only JetBlue reporting in line earnings, while Skywest missed the same. Solid demand particularly from the business and leisure group of travellers drove the result positively. The strong results have prompted bellwethers like United Continental and American Airlines to announce stock buybacks.

3 Airline Stocks to Buy Now

United Continental Holdings Inc. (NYSE:UAL-Free Report) is one of the major carriers in the U.S. and operates through its mainline and regional partners. It operates in the United States, Asia-Pacific, Europe, Africa, the Middle East and Latin America and has an approximate fleet of 700 aircrafts.

The Zacks Consensus Estimates for third-quarter 2014 is $2.29, representing a robust year over year growth of 51.88%. The company registered an average positive earnings surprise of 3.95% over the trailing 12 months. This Chicago-based airline currently has a P/E ratio of 10.74 and is trading at a significant discount to the industry average of 20.20. United Continental Holdings spots a Zacks Rank #1 (Strong Buy).

Southwest Airlines Co. (NYSE:LUV-Free Report) is a Dallas-based airline that provides low-cost passenger air transportation services in the U.S. It primarily provides short-haul, high frequency, point-to-point airline services covering many secondary or downtown airports such as Dallas Love Field, Houston Hobby, Chicago Midway, Baltimore/Washington International, Burbank (Los Angeles), Manchester (Boston), Oakland and San Jose. As of Jun 30, 2014, Southwest operated 695 Boeing aircraft and served 93 destinations in approximately 40 states.

The Zacks Consensus Estimates for third-quarter 2014 is 48 cents, representing a year over year growth of 41.54%. The company registered an average positive earnings surprise of 12.84% over the trailing 12 months. Southwest Airlines currently has a Zacks Rank #1 (Strong Buy).

Spirit Airlines Inc. (Nasdaq:SAVE-Free Report) is a low fare airline based in Miramar, FL. The carrier operates 270 daily flights to 55 destinations across the U.S., Latin America and the Caribbean. As of Jun 30, 2014 the company had a fleet of 57 single aisle aircrafts consisting of Airbus planes.

The Zacks Consensus Estimates for third-quarter is 98 cents, representing a year over year rise of 23.84%. The company registered an average earnings surprise of 9.20% over the trailing 12 months. Spirit Airlines holds a Zacks Rank #1 (Strong Buy).

What Lies Ahead?

According to International Energy Agency (IEA) crude oil price is expected to remain subdued going forward owing to strength in global oil supplies. The soft crude price will act as a catalyst behind airline companies' further rise in profitability.

Yelp! Continues to Expand

Online local guide, Yelp Inc. (NYSE:YELP-Free Report) recently announced that it will open a new office in Chicago's Merchandise Mart in 2015. Per the lease agreement, the company has agreed to take an area of around 50,000 square feet on lease at the Merchandise Mart, which has lately evolved into a hub for tech startups.

Over the next one and a half years, the online review site plans to hire about 300 personnel in Chicago for the same. The company also announced that a majority of these jobs will be related to sales and marketing.

Yelp's Chicago office will be its seventh worldwide after San Francisco, Scottsdale, New York, London, Hamburg and Dublin. The company selected Chicago owing to a strong lineup of local businesses, a flourishing tech community and a talented workforce.

Yelp continues to extend its foothold in South America. The company recently expanded into Chile, which has a better economic stability and prosperity among Latin American nations. Chile is the twenty-eighth nation worldwide to get Yelp's services. In 2014 itself, the company has opened its services in Japan, Mexico, Portugal and Argentina.

In the recently concluded second quarter of fiscal 2014, total international traffic grew 80% year-over-year to approximately 31 million unique visitors on a monthly average basis.

We believe that the international expansion initiatives undertaken by the company will help in boosting ad revenues going forward. However, these will increase selling and marketing expenditures considerably, which in turn may lower profitability going forward.

For the first time in its history, Yelp reported a profit in the recently concluded second quarter of fiscal 2014. Management provided an optimistic guidance for the third quarter and full year. The positive guidance reflects strong growth in user base (particularly mobile), its entry into new markets (both domestic & international) and also new partnerships.

Moreover, the acquisition and integration of its European competitor, Qype, has led to a contribution of 1.8 million reviews and 1.4 million photographs.

Although fierce competition from the likes of Facebook (Nasdaq:FB-Free Report) in the brand-related revenue market and rising product development costs remain headwinds, we believe that Yelp will benefit from robust growth in active local business accounts and improving mobile customer engagement.

Currently, Yelp has a Zacks Rank #2 (Buy).

Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.

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