Stock of the Week
NYSE Symbol: DAL
Price as of 7/23: $39.15
The markets have relentlessly moved higher this year following a spectacular 2013. It's getting tougher and tougher to find good value in the markets with the major averages at all-time highs, trading for 17 times earnings. An overdue correction would be healthy for the markets at this point as we are now in the third longest bull market without a 10% correction. Seasonally and statistically the weakest months of the year (August and September) are rapidly approaching so a correction could be right around the corner. Investors may be wise to tread cautiously in the short term. Many investors have been smart to follow the Dow Theory forecast which says as long as the Dow Jones Industrial Average and the Dow Jones Transportation Average make new highs, the bull market remains intact. The Transports and the Dow Jones Industrials have made new all-time highs, time and time again this year including this week. The transports have been on a tear thanks to the railroads carrying natural gas and oil around the country coupled with the consolidated airline industry which is more profitable than ever. This week we'll highlight one of the top airlines in the country. The stock of the week is Delta Airlines. Delta has performed very well the last 5 years after merging with Northwest Airlines. Consolidation has been the name of the game in the airline industry with UAL merging with Continental and US Airways merging with American Airlines. The recent consolidations, the improving economy and expansion overseas has boosted airline earnings and stock prices. US Airways is up 75% since we highlighted it last November while Delta is up an impressive 40% since last fall. A recent pullback and better than expected earnings this morning from Delta makes this stock look like it has more appreciation potential and more blue skies in the future.
As mentioned, Delta Air Lines reported second-quarter earnings this morning up 17 percent, topping analysts' expectations, as passengers flew more miles at higher average fares while fuel spending declined during the quarter. For the second quarter, the Atlanta-based company said that net income increased to $801 million, or 94 cents per share, from $685 million, or 80 cents per share, in the same quarter a year ago. Earnings, adjusted for one-time gains and costs, were $1.04 per share. The average estimate of analysts surveyed by Zacks Investment Research was for earnings of $1.03 per share. The company said revenue climbed 9.4 percent to $10.62 billion from $9.71 billion beat Wall Street forecasts. Analysts expected $10.59 billion, according to Zacks. The better than expected earnings were helped by strong demand in corporate contracts and domestic traffic. Fuel spending helped as well declining 6 percent to $2.43 billion, offsetting a 6 percent gain in labor costs to $2.05 billion. Like other airlines, Delta has been adding flights cautiously even as demand as grown, cramming more passengers on each plane. By limiting seats or capacity, airlines have kept fares high. CEO Richard Anderson said Delta would continue its "disciplined approach" to adding new flights. The company's operating margin climbed to 15.1 percent, and it predicted margins of 15 percent to 17 percent in the third quarter.
Delta is up over 30% this year after rising over 100% last year, but even though the stock is up a lot, earnings estimates have kept pace. Even with the run up, Delta only trades for 10 times earnings and 0.8 times sales. Delta does provide a modest dividend with a yield of 0.60%. But improving cash flow will allow the company to hike the dividend in the future. With improving earnings comes improving cash flow. Delta has built up its cash level to $3.66 billion generating free cash flow of over a billion dollars a quarter. Plenty of analysts see Delta moving higher with price targets in a range of $44 to $49 a share. In the short term we may see more volatility in the industry, but strong earnings and strong cash flow should keep the stocks moving higher.