Delta Tumbles: What Wall Street's Saying

NEW YORK (TheStreet) - Delta (DAL) shares tumbled more than 5% on Wednesday after the airline narrowed its guidance for third-quarter passenger revenue growth.

The Atlanta-based airline said that passenger revenue per available seat mile (otherwise known as PRASM in airline lingo) rose 2% in August compared to the same period last year. Delta attributed the growth to continued strength in the U.S., which offset one point of negative revenue pressure from recent events in Russia, the Middle East and Africa.

For the quarter, it projected a range of 2%-3% of growth in its passenger revenue per seat mile, compared to 2%-4%, previously. Delta also said it expects the September-ending quarter's fuel price per gallon between $2.90 and $2.95 on an adjusted basis. Delta reported a completion factor for its mainline of 99.6% for August and an on-time arrival rate of 84.3%. 

Shares closed down 5.2% to $38.82 on Wednesday, but are up 41.4% year to date.

Here's what analysts are saying about Delta:

Jamie Baker, J.P. Morgan (Overweight; $54.50 PT)

DAL shares are currently holding up better than the last time guidance was affirmed at the low end. A second consecutive day of material jet fuel price declines is likely contributing. If one's thesis on DAL was predicated solely on achieving $1.25 in 3Q earnings, then there may be no reason to step up, in our view. However, if one's thesis is close to our own, that US airlines have turned a notable secular corner from which they are unlikely to deviate, and should continue closing their margin gap to other high quality industry transports and achieve peak operating margins 50% higher than anything seen in the past while simultaneously committing capital not solely to their fleets but rather to dividends and buybacks hence driving multiples higher over time...(quite the run-on sentence)...then we simply fail to identify anything in Delta's release that causes our conviction to waiver. Instead, we expect the pace of seasonal (sequential) capacity cuts to crescendo at Delta and elsewhere, which coupled with lower fuel prices and the time-tested observation that airline stocks are often best-purchased around the Autumnal equinox, suggest attractive risk/reward across the space heading into 2015.

Our model continues to incorporate ~2.5% unit revenue (PRASM) growth, 1.5% nonfuel unit cost (CASM ex) growth and $3.05/gal fuel in 2015, along with $1B/year in share repurchases, which would still allow ~$1B in cash to accrue to the balance sheet annually (pre air traffic liability). However, assuming combination of sustained demand strength, reasonable supply growth, and further benefit from up-gauging, we see potential for another year of 3-4% PRASM growth with relatively flat CASM (cost per available seat mile). Our 2015 EPS estimate would move up to $4.50+ under this scenario while with flat fuel ($2.96) and full balance sheet utilization our estimate would eclipse $5.00.

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 several positive factors, 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, attractive valuation levels, solid stock price performance, revenue growth and largely solid financial position with reasonable debt levels by most measures. We feel these strengths outweigh the fact that the company shows low profit margins."

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.
  • Investors have apparently begun to recognize positive factors similar to those we have mentioned in this report, including earnings growth. This has helped drive up the company's shares by a sharp 108.52% over the past year, a rise that has exceeded that of the S&P 500 Index. 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 revenue growth significantly trails the industry average of 48.4%. Since the same quarter one year prior, revenues slightly increased by 9.4%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • The debt-to-equity ratio is somewhat low, currently at 0.85, and is less than that of the industry average, implying that there has been a relatively successful effort in the management of debt levels. Even though the company has a strong debt-to-equity ratio, the quick ratio of 0.41 is very weak and demonstrates a lack of ability to pay short-term obligations.

--Written by Laurie Kulikowski in New York.

Follow @LKulikowski

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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