Delta Air Lines' (DAL) Q3 Earnings: A Beat in the Offing?

Delta Air Lines, Inc. DAL is slated to release its third-quarter 2018 results, before the market opens on Oct 11.

In the second quarter of 2018, the company delivered a positive earnings surprise of 2.91%. The bottom line also expanded on a year-over-year basis despite high fuel costs. Results were aided by higher revenues.

We expect this S&P 500 company to outperform on the bottom-line front in the to-be-reported quarter as well. Strong demand for air travel is likely to aid results. The stock has witnessed the Zacks Consensus Estimate for third-quarter earnings being revised upward to the tune of 0.6% over the last 60 days. This reflects investor optimism surrounding the stock.

Moreover, shares of this Atlanta-GA based airline behemoth have performed well, outperforming its industry in the July-September period. Delta has rallied 16.8% compared with the industry’s 7.6% growth.

 

Our quantitative model too indicates an earnings beat in third-quarter 2018. Here's why:

Delta has the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or better — for increasing the odds of an earnings surprise.

Earnings ESP:  Delta has an Earnings ESP of +0.35% as the Most Accurate Estimate is $1.77, while the Zacks Consensus Estimate is pegged 1 cent lower. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Delta carries a Zacks Rank #3. Note that stocks with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 have a significantly higher chance of beating earnings estimates. You can see the complete list of today’s Zacks #1 Rank stocks here.

Conversely, Sell-rated stocks (Zacks Rank #4 or 5) should never be considered going into an earnings announcement.

Delta Air Lines, Inc. Price and EPS Surprise

 

Delta Air Lines, Inc. Price and EPS Surprise | Delta Air Lines, Inc. Quote

Given this backdrop, let’s delve deeper to unearth the factors that are likely to influence the company’s third-quarter results:

We expect Delta’s top line to be driven by higher passenger revenues owing to solid demand for air travel. The Zacks Consensus Estimate for third-quarter passenger revenue per available seat mile (PRASM) is pegged at 14.95 cents, above 13.40 cents registered in the third quarter of 2017.

Buoyed by the improved scenario, the company issued a bullish outlook with respect to adjusted total revenue per available seat miles (TRASM: a key measure of unit revenue) for the to-be-reported quarter. RASM is anticipated to increase year over year between 4% and 5% in the third quarter (the previous view had projected the metric to increase in the 3.5-5.5% band). The Zacks Consensus Estimate for third-quarter RASM is pegged at 16.55 cents.

Adjusted pre-tax margin is anticipated to be approximately 13%. Delta’s third-quarter earnings per share are expected to be in the $1.70-$1.80 band. Notably, this projection is higher than $1.57 per share registered in the year-ago period. The uptick can be attributed to a reduction in the effective tax rate, which is expected to be approximately 23% in the quarter to be reported.

However, high fuel costs are likely to act as a key dampener to Delta’s earnings in the third quarter similar to the past few quarters. Fuel price per gallon is expected to be between $2.22 and $2.27. The Zacks Consensus Estimate for third-quarter average fuel price per gallon (mainline: net of hedging gains) stands at $2.35, significantly higher than $1.59 reported a year ago.

Apart from high fuel costs, expenses on the labor front are expected to limit bottom-line growth. The carrier envisions non-fuel unit costs to be roughly flat year over year. Moreover, Delta anticipates Hurricane Florence to hurt third-quarter pre-tax income by approximately $30 million. According to Delta, weather-related disruptions might weigh on unit revenues by roughly 0.5 points.

Stocks That Warrant a Look

Investors interested in the broader Transportation sector  may check out CSX Corporation CSX, Norfolk Southern Corporation NSC and United Parcel Service, Inc. UPS, awaiting earnings releases this time around:

CSX has an Earnings ESP of +1.99% and a Zacks Rank #2. The company is scheduled to announce third-quarter results on Oct 16.

Norfolk Southern Corporation has an Earnings ESP of +0.83% and a Zacks Rank #3. The company is scheduled to release third-quarter results on Oct 24.

UPS has an Earnings ESP of +0.14% and a Zacks Rank of 3. The company will report third-quarter 2018 results on Oct 24.

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