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solzberg in Gainers & Losers,

Shares of Delta up on Q1 earnings beat

Delta Air Lines, one of the US leading passenger and cargo carriers, issued decent financials for the first quarter of 2016. Revenues came in at $9.25 bn, down 1.5% y-o-y and marginally short of the consensus estimate of $9.27 bn. The top line was hurt by adverse foreign currency movements as well as by the terrorist attacks in Brussels last month. Q1 revenue passenger miles (a measure of air traffic) went up 3.3% to 47.72 bn, capacity or available seat miles climbed 2.7% to 58.14 bn, and load factor (percentage of seats filled by passengers) improved 40 basis points to 82.1%. However, passenger revenue per available seat mile (PRASM) declined 4.6% to 13.35 cents mainly owing to currency woes. Operating income grew 10.2% to $1.54 bn supported by lower fuel costs that fell 54.6% to $1.33 per gallon, and operating margin climbed 170 basis points to 16.6%. Adjusted earnings per share of $1.32 beat analysts’ average projection by 3 cents and more than doubled y-o-y.

In Q1, Delta generated free cash flow of $497 mn and adjusted operating cash flow of $1.35 bn. Adjusted net debt was $7 bn, and the company is on track to reduce it below $6 bn by the end of 2016. During the quarter, Delta returned $882 mn to its shareholders through dividends ($107 mn) and buybacks ($775 mn). I'm are impressed with the company’s efforts to return greater value to shareholders.

For the second quarter of 2016, Delta expects operating margin in the range of 21-23%. The estimated fuel price, including taxes and hedges, is projected in the band of $1.48-1.53 per gallon. System capacity is likely to rise 2-3% on a year-over-year basis. Meanwhile, passenger unit revenue is projected to decline in the range of 2.5-4.5%, although the company will continue to focus on getting unit revenues back to a positive trajectory.

I believe that improving operating metrics combined with costs discipline and low fuel prices will allow the company to show solid financial performance going forward. 

Recently, shares of Delta exceeded their 50-day moving average as well as the $48 resistance level. I expect the stock to continue to go up, with medium-term target at $55.