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Why Delta Shares Are Poised to Fly Higher

NEW YORK (TheStreet) -- Shares of Delta Air Lines tripled in just two years. As Wednesday's earnings show, Delta continues to fire on all cylinders; its shares are poised to rise even further.

Over the years, Delta has managed to grow its revenue, while improving efficiency. For example, passenger revenue per available seat mile, or unit revenue, increased at an impressive 5.7% year over year in the second quarter. What's more, its five-year CAGR is approximately 6.5% -- another improvement.

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Passenger load factor -- which measures how efficiently an airline fills seats and generates fare revenue -- increased to 86.3% from 84.8% in the first quarter of 2013. That compares well with the roughly 79% industry average calculated by the International Air Transport Association reported earlier this month.

Delta reported an operating margin of 14.9% during the most recent quarter compared to 9.4% over the same time last year. This is not just a one-off event, as the company has improved its operating margins in each of the last three years, growing from just 5.6% in 2011 to 9.0% in 2013. In its upcoming quarter, Delta expects to increase operating margin to 15%-17%.

These results are likely achievable considering Delta should see increasing demand in the coming months, as the June and September quarters typically see higher demand as vacation air-travel during these months increase.

Delta keeps looking toward the future through its partnerships with other airlines such as Virgin America and AeroMexico, which are expected to provide access to high-growth markets.

Delta's 2012 investment in a refinery has also borne fruits, given the decreasing amount of money the company spends on fuel. Although the number of gallons of fuel consumed has increased, the cost of this fuel had decreased. As a result, the percentage of operating expenses related to fuel has decreased to 33% from 36% in 2013. Furthermore, the company reported that its Trainer oil refinery in Delaware County posted a $13 million profit in the second quarter.

Last but not least, Delta continues to grow its free cash flow, paying some debt and contributing to the defined benefit pension plan. The airline reduced its net debt to below $8 billion, while adding approximately $900 million to its pension plan. Moreover, Delta continues to return money to its shareholders through dividends and share repurchases.

Ultimately, Delta's management team has proven to be not only capable, but shareholder-friendly.

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

TheStreet Ratings team rates DELTA AIR LINES INC as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:

"We rate DELTA AIR LINES INC (DAL) a BUY. This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its notable return on equity, reasonable valuation levels, solid stock price performance, compelling growth in net income and revenue growth. We feel these strengths outweigh the fact that the company shows weak operating cash flow."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Compared to other companies in the Airlines industry and the overall market, DELTA AIR LINES INC's return on equity significantly exceeds that of both the industry average and the S&P 500.
  • Powered by its strong earnings growth of 2400.00% and other important driving factors, this stock has surged by 83.58% over the past year, outperforming the rise in the S&P 500 Index during the same period. Regarding the stock's future course, although almost any stock can fall in a broad market decline, DAL should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Airlines industry. The net income increased by 2942.8% when compared to the same quarter one year prior, rising from $7.00 million to $213.00 million.
  • The revenue growth significantly trails the industry average of 43.9%. Since the same quarter one year prior, revenues slightly increased by 4.9%. Growth in the company's revenue appears to have helped boost the earnings per share.

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