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Delta (DAL) Up 8.4% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Delta Air Lines (DAL). Shares have added about 8.4% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Delta due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Earnings Beat at Delta in Q3

Delta's earnings (excluding 1 cent from non-recurring items) of $2.32 per share outpaced the Zacks Consensus Estimate of $2.27 and increased 28.9% on a year-over-year basis mainly due to low fuel costs. Operating revenues in the quarter under review came in at $12,560 million, marginally missing the Zacks Consensus Estimate. However, the top line increased on a year-over-year basis.

Other Details

Passenger revenues, which accounted for 90.8% of the top line, improved 6% mainly due to strong demand for air travel. Meanwhile, cargo revenues declined 17%. Other revenues increased 3%. The average fuel price (adjusted) in the third quarter was $1.96 per gallon, down 11.5% on a year-over-year basis.

Revenue passenger miles (a measure of air traffic) increased 5.6% to 66.86 billion. Capacity or available seat miles expanded 3.9% to 75.74 billion. Load factor (percentage of seats filled by passengers) improved 140 basis points to 88.3% as traffic growth outpaced capacity expansion. Passenger revenue per available seat mile (PRASM) increased 1.7% year over year to 15.06 cents. Passenger mile yield improved 0.1% to 17.07 cents. On an adjusted basis, total revenue per available seat mile (TRASM) in the third quarter increased 2.5% year over year to 16.57 cents driven by healthy demand for leisure and corporate travel.

Total operating expenses, including special items, climbed 2% year over year to $10,489 million. Operating cost per available seat mile decreased 2.1% to 13.85 cents due to lower fuel costs and higher capacity. However, non-fuel unit costs increased 2.4% year over year to 9.84 cents due to high employee costs, increase in passenger volumes among other factors.

Liquidity, Dividend and Share Repurchase

Delta generated free cash flow of $1.4 billion and operating cash flow of $2.2 billion in the third quarter. On a year-to-date basis, the carrier generated $7.5 billion of operating cash flow and $4 billion of free cash flow.

Long-term debt and finance leases stood at $7,923 million at the end of the reported quarter compared with $8,253 million at the end of 2018. The company has managed to reduce its net debt significantly from the 2009 levels. Delta exited the quarter with $1,899 million in cash and cash equivalents.

Delta returned $468 million to its shareholders through dividends ($208 million) and share buybacks ($260 million) in the quarter under review.

4Q Guidance

For fourth-quarter 2019, the carrier anticipates pre-tax margin in the range of 9.5-11.5%. The estimated fuel price, including taxes, settled hedges and refinery impact, is expected in the band of $2-$2.20 per gallon. Total unit revenue, on an adjusted basis, is anticipated to be either flat or increase up to 2% year over year.

System capacity is anticipated to be up approximately 4.5% on a year-over-year basis. Cost per available seat mile, excluding fuel and profit sharing, is projected to rise 4-5% in the fourth quarter.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -7.86% due to these changes.

VGM Scores

Currently, Delta has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Delta has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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