We expect airline behemoth Delta Air Lines, Inc. (DAL) to report better-than-expected fourth-quarter 2014 earnings on Jan 20, 2015. With the results scheduled to be declared prior to the commencement of trading on that day, Delta will kick off the earnings season in the airline sector.
Why a Likely Positive Surprise?
Our proven model shows that Delta is poised to beat earnings this quarter as it has the right combination of 2 key components:
Zacks ESP: The carrier currently has an Earnings ESP of +2.67%. This is because the Zacks Consensus Estimate stands at 75 cents per share, while the Most Accurate Estimate is higher at 77 cents.
Zacks Rank: Delta carries a Zacks Rank #1 (Strong Buy). Note that stocks with Zacks Rank #1, 2 and 3 have a higher chance of beating earnings. Conversely, Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.
The combination of Delta’s Zacks Rank #1 and earnings ESP of +2.67% makes us confident of an earnings beat at the company.
What's Driving the Better-than-Expected Earnings?
Delta has delivered positive earnings surprises in each of the last four quarters, with an average beat of 4.91%. The company, along with peers such as Southwest Airlines Co. (LUV), is benefiting considerably from persistent weak oil prices. Delta’s results in the final quarter of the year will likely be positively impacted by low fuel costs. This is because fuel costs account for a major chunk of an airline's operating expenses. Consequently, cheaper oil price should boost Delta’s bottom-line in the quarter.
We are also impressed by Delta’s strong balance sheet. The company’s efforts to reward shareholders through dividends and share repurchases infuse confidence. Moreover, the positive outlook provided by the carrier on Jan 5 is also encouraging. The company expects operating margin for the final quarter of 2014 in the range of 12% to 13%, which reflects a significant improvement from the comparable figure of 8.5% recorded a year-ago. Moreover, passenger revenue per available seat mile (a measure of unit revenue) is expected to increase by approximately 1% in the quarter. The company projects the average fuel price per gallon (inclusive of taxes, settled hedges and refinery impact) for the fourth quarter in the band of $2.59 to $2.64.
Most importantly, Delta has witnessed upward revisions in earnings estimates driven by the multiple positives cited above. The Zacks Consensus Estimate for fourth-quarter earnings has moved north by 13.6% over the last 90 days.
Other Stocks to Consider
Delta is not the only carrier looking up this earnings season. The following airline stocks are also likely to beat earnings in the upcoming quarter:
Alaska Air Group, Inc. (ALK): The parent company of Alaska Airlines – Alaska Air Group will unveil its fourth quarter earnings numbers on Jan 22, before market opens. The Seattle, WA-based company carries a Zacks Rank #2 (Buy) and has an earnings ESP of +3.41%.
Ryanair Holdings plc (RYAAY) has an earnings ESP of +400% and a Zacks Rank #1. The company is expected to report results on Feb 2.
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