Earnings season can sometimes give you false signals about a company’s outlook and likely near term trading potential. A great example of this is Delta Air Lines (DAL – Analyst Report) and their most recent report.
Yes, DAL beat earnings by about 3.5% and investors saw a modest increase in share prices following this release. The company also reported back that revenue passenger miles were up three percent year-over-year, while costs were slashed due to lower fuel prices.
While these are all positives, it doesn’t tell the whole story for DAL. The company missed sales estimates—albeit just barely—while available seat miles were up 3.2%, helping to push the load factor down by 10 basis points. Thanks in part to this, passenger mile yield and passenger revenue per available seat mile were both down year-over-year, and these are key metrics for airlines so that is certainly disappointing.
Beyond that, it is also important for investors to note the outlook for DAL stock given to us by management. They expect capacity to increase between 1% and 2%, while they project further declines in passenger unit revenue in the third quarter to the tune of 4%-6%.
So while DAL might have had a decent reaction to earnings on the initial session, the outlook certainly isn’t as rosy. And if you don’t believe me—or DAL management for that matter– consider some recent shifts to analyst expectations for the stock as well.
In just the past week, we have seen analysts slash estimates for the current quarter, next quarter, current year, and next year time frames. And for both of the full year periods, it has been universal, as no analyst has increased estimates in the past two months, let alone the past seven day time frame.
Even more troubling is the pace of these estimate cuts, as 30 days ago analysts were looking for earnings of $6.31/share for the current year and are now expecting just $5.90/share instead. We see a similar trend for next year’s time frame too, as this has gone from $6.57/share to $5.92/share over the past month.
Bottom Line & Other Picks
So while the initial DAL earnings report may have been reasonably promising, we can see that some of the metrics for the outlook aren’t quite as good. No wonder the stock currently has a Zacks Rank #5 (strong sell) and that we are looking for a return back to turbulent trading before long in this airline stock.
But if you want to stick to the airline industry for better selections, then you should be aware that the pickings are slim. The industry is in the bottom 10% for industry ranks, while there are few companies with ‘buy’ ranks.
There is a trio of companies that have potential for investors right now though, and they include LATAM Airlines (LFL – Snapshot Report) , ANA Holdings (ALNPY – Snapshot Report) , and Cathay Pacific ( (CPCAY – Snapshot Report) . This trio are the best three of 26 stock airline segment right now and all are definitely better positioned than DAL to soar higher this summer thanks to a much strong outlook on the earnings estimate revision front.