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Delta Takes Flight: Earnings Preview

BOSTON (TheStreet Ratings) -- Delta Airlines (DAL) is expected by analysts to report a 15% drop in third-quarter profit Tuesday.

Analysts are forecasting Delta will say earnings fell to $0.93 per share, compared with $1.10 a year earlier. Revenue is estimated to increase to $9.73 billion from $9 billion, according to a poll of analysts by Thomson Reuters. Delta is the third of the major airlines to report earnings.

Fuel, the most significant expense, has been a thorn in the side of the airlines over the past year, as prices have appreciated more than 40%. Southwest, which reported last Thursday, announced better-than-expected results, but said fuel-hedging costs ate into profits.

While airlines can compensate some of the costs with fare increases or capacity cuts, almost all employ some sort of fuel hedging. Yet, with fuel costs down over 10% in the past six months, hedging done in the second quarter is likely to lead to losses in the third quarter. That could also weigh on Delta.

Aside from the potential effects of fuel pricing, Delta has been taking the right steps to improve profitability and retire debt. Delta expects capacity cuts of 1% in the third quarter and 4% to 5% in the fourth quarter. The company also expects that passenger unit revenue (or revenue per available seat mile) will increase by 10.5% in the third quarter from a year earlier.

Wall Street analysts are starting to take notice of the turnaround at Delta. Jamie Baker at JPMorgan notes that airlines are in a much better position than they were a few years back, flush with cash and more profitable. Delta, his favorite in the group, is undervalued, given that it's trading at a valuation similar to that of 2009.

TheStreet Ratings, an independent-research unit of TheStreet rates Delta "hold." Below is a look at second-quarter earnings from TheStreet Ratings' research report.

Delta experienced a steep decline in earnings per share. The company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, Delta turned around its bottom line by earning $0.69 versus minus $1.49 in the prior year. This year, the market expects an improvement in earnings ($1.11 versus $0.69).

The company's strengths can be seen in multiple areas, such as its revenue growth and notable return on equity. However, as a counter to these strengths, we also find weaknesses including a generally disappointing performance in the stock itself, unimpressive growth in net income and significant debt position.

The debt-to-equity ratio is very high at 18.68 and currently higher than the industry average, implying there is poor management of debt levels. Along with this, the company manages to maintain a quick ratio of 0.48, which clearly demonstrates the inability to cover short-term cash needs.

>>For upcoming earnings and estimates, see our Earnings Calendar.

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