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Delta's 2016 Earings

Old 12-15-2015, 12:52 AM
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Default Delta's 2016 Earings

Summary

Continued low oil prices are expected to help Delta grow earnings 24% in 2016.

While revenue per passenger has declined year over year, the company is taking steps to limit capacity growth in order to improve PRASM and margin growth.

Delta trades at a forward P/E of 9 compared to peers like Southwest and JetBlue that trade at 11-12 times forward earnings.

Cuts in overseas markets should help boost margins in 2016.

Passenger load factors for Delta are some of the best in the industry.

Transportation stocks in general have had a rough year in 2015 with the Dow Jones Transport Index down over 15% as we prepare to close out the year. Airlines have performed modestly better as a whole, but it's been hit and miss. Stocks like JetBlue Airways (NASDAQ:JBLU) and Alaska Air Group (NYSE:ALK) are both up over 40% while laggards like United Continental (NYSE:UAL) and American Airlines Group (NASDAQ:AAL) are down double digits.

Delta Air Lines (NYSEAL) has had a decent year thus far in 2015 returning shareholder just over 5%. There are a number of factors in place, however, that suggest that Delta could be in for an even bigger year in 2016. Oil prices, revenues per passenger, foreign exchange rates and valuations will all factor into the stock's performance in the coming year but I like the way Delta is currently positioned to take advantage of some of these trends. For the reasons I'm about to discuss, I think Delta could be a top choice for 2016.

Continued low oil prices boosting the bottom line

Oil prices are near lows last seen in 2008 as OPEC countries continue to pledge that they'll maximize production in the face of crude oversupplies. With the Fed likely to raise interest rates at any moment, a lot of pressure will continue to weigh on crude prices likely keeping them in the mid $30 range until something - a pullback in production or an increase in oil demand or both - changes.

Low oil prices are damaging to energy companies but are welcome news for airlines. In the 3rd quarter of 2015, Delta reported net income of $1.3 billion versus $0.4 billion in the same quarter a year ago. At the same time, fuel expense fell to $1.1 billion from $1.8 billion year over year. I'd expect this trend to continue at least through the first half of 2016 as oil supply and demand remains out of whack, but this assumption may need to be revisited in the second half of the year if production levels change.

Taking steps to maximize revenue per passenger

Passenger revenue per available seat mile (PRASM) remains one of the go-to metrics to determine how well an airline is functioning. The airlines lately have been issuing cautious forecasts with Delta being no exception. Delta reported a 5% decline in PRASM in Q3 on 3% capacity group and forecasted a 2.5-4.5% drop in the Q4. One encouraging sign of a PRASM turnaround is that Delta already announced that it expects to come in on the high end of Q4 expectations.

(click to enlarge)


2015 PRASM came down as capacities were rising. Therefore, Delta has set a goal of raising capacity only in the 0-2% range in 2016 in order to turn PRASM positive again. Passenger revenues showed the biggest decreases in its overseas markets, and the company will be making cuts in those areas in order to boost margins and profitability.

(click to enlarge)


Passenger load factors don't seem to be an issue for Delta as the company reported a figure of 87.3% for the month of August which should further support PRASM growth going forward.

Stock valuation

Airline stocks in general sport lower valuations than the broader market but Delta seems undervalued even by these modest expectations.

Delta carries a forward P/E of just under 9 based on 2016 earnings. Delta's earnings are also expected to grow around 24% in 2016 compared to 2015 which suggests that some multiple expansion could be in order. Southwest, JetBlue and Alaska Air all have forward P/Es in the 11-12 range. A 20% multiple expansion might not be in the cards for Delta but it could begin approaching the valuations of its peers.

Conclusion

There are a lot of moving parts in play for Delta, but I like where the company sits right now. Bets could be off if oil prices begin to unexpectedly rise again. Foreign exchange could be another headwind although the dollar seems to have stabilized lately.

The company seems to be taking logical steps to improve PRASM and with valuations low, earnings rising, and passenger loads strong, Delta's stock could be a strong performer in 2016.
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Old 12-15-2015, 12:54 AM
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IMO Delta will easily earn $9 Billion plus in 2016 with a forward P/E of 12 or more.
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Old 12-20-2015, 09:13 AM
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Didn't our Rocket Surgeon C44 FO rep (who used to frequent this forum) tell us:

He's seen the inside data, the sky is falling, airline industry rapidly going down the tubes, so, hurry up and take concessions!

So glad that guy is gone.
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Old 12-20-2015, 09:57 AM
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Well he's NOT gone yet, not until March!

In the mean time he, and the other 3 ATL Reps (who were all voted out) were able to vote on who is on our negotiating committee and they still give them direction, if we are to believe how they say the process works.

Is it on Tuesday Dec 22, that they are supposed to re-engage with management?

And if by chance there is a TA2 before March 1, these same nit wits will be voting on it again, all YES no doubt!
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Old 12-20-2015, 10:00 AM
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Here and with the title of the thread I though that Delta would mandate earings as part of the new uniform!!
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Old 12-20-2015, 10:15 AM
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Do we wear them on the left ear if we voted no for the TA and and on the right if we voted yes?
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Old 12-20-2015, 12:54 PM
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Originally Posted by Klondike Bear View Post
Do we wear them on the left ear if we voted no for the TA and and on the right if we voted yes?
Hmm... There must be a deeper meaning.. .
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Old 12-20-2015, 04:06 PM
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Originally Posted by badflaps View Post
Hmm... There must be a deeper meaning.. .
Left is right, Right is wrong.... right?
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Old 12-21-2015, 05:22 AM
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Originally Posted by Schwanker View Post
Didn't our Rocket Surgeon C44 FO rep (who used to frequent this forum) tell us:

He's seen the inside data, the sky is falling, airline industry rapidly going down the tubes, so, hurry up and take concessions!

So glad that guy is gone.
..and he ran again as if nothing had happened. It's hard to be that disconnected.
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Old 12-21-2015, 05:31 AM
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Originally Posted by Timbo View Post
Well he's NOT gone yet, not until March!

In the mean time he, and the other 3 ATL Reps (who were all voted out) were able to vote on who is on our negotiating committee and they still give them direction, if we are to believe how they say the process works.

Is it on Tuesday Dec 22, that they are supposed to re-engage with management?

And if by chance there is a TA2 before March 1, these same nit wits will be voting on it again, all YES no doubt!
I'm happy to vote no again. I'll live under this contract till they supply a better one. I'm not voting in something worse for a few schillings.

We as pilots are already at red line. The company wants more productivity but there is noting more to give. We already fly too much, guys are collapsing in the seat or a few years after retiring.

There is no more productivity to give yet they want more and then complain when we call in sick.

There is an event horizon where any more productivity becomes less productive. We have crossed that boundary.

It's January and I can't move my days around because of min reserve coverage yet they say my fleet is over staffed. Hmmmm

Something is rotten in Denmark.
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