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Delta Rises on Its Q2 Earnings Beat and Optimistic Outlook

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Earnings beat estimates

Delta Airlines (DAL) stock was up 3% in premarket trading on Thursday after the company released better-than-expected earnings results for the second quarter. Its second-quarter adjusted EPS of $2.35 surpassed analysts’ consensus estimate of $2.28 and marked its eighth consecutive quarter of positive earnings surprises.

Delta’s quarterly earnings were also in line with the high end of its guidance range of $2.25–$2.35 and registered a whopping ~33% YoY (year-over-year) rise. Higher revenue and cost-cutting measures mainly drove the company’s second-quarter earnings higher.

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Strong revenue growth

Delta reported record quarterly adjusted revenue of $12.54 billion in the second quarter, with 52% of its adjusted revenue coming from premium products and non-ticket sources. The company’s quarterly revenue came in slightly ahead of analysts’ consensus estimate of $12.50 billion.

On a YoY basis, its revenue rose 8.7%, higher than its recently updated guidance of 8%–8.5%. Higher unit revenue, a 10% increase in premium tickets, and double-digit sales growth in its non-ticket sources mainly drove the company’s second-quarter revenue.

Delta’s adjusted unit revenue for the quarter rose 3.8% primarily due to healthy leisure and corporate demand and an approximate one-point benefit from its renewed credit card agreement with American Express (AXP). This YoY growth was higher than its recently updated guidance of 3.5%.

Costs and margins

Delta’s ex-fuel cost per available seat mile increased 1.4% mainly due to higher investments in people and products, which more than offset the savings from its fleet transformation and One Delta efficiency improvement initiatives. The increase in the company’s ex-fuel costs was within its recently updated guidance range of 1%–2%.

Its fuel cost per gallon of $2.08 was toward the lower end of its guidance range of $2.07–$2.12. On a YoY basis, its fuel cost per gallon fell 4.4%.

The company’s adjusted pretax margin expanded 190 basis points to 15.9% in the quarter from 14% in the previous year’s quarter, mainly driven by higher revenue and efficient cost management. Delta’s adjusted pretax margin came in at the higher end of its previous guidance range of 15%–16%.

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Cash flows and shareholder returns

During the quarter, the company generated $3.3 billion worth of operating cash flow and $1.8 billion worth of free cash flow. In the first half of 2019, the company’s operating and free cash flows were $5.2 billion and $2.5 billion, respectively.

In the second quarter, the company repaid the $1 billion short-term loan that it used to complete its accelerated share repurchase program in the first quarter. The company also invested $1.4 billion in aircraft purchases and improvements in the quarter.

Delta continued with its shareholder return policy in the second quarter. It paid $229 million in dividends and repurchased shares worth $268 million in the quarter.

Concurrent with its earnings release, the company’s management announced a 15% increase in its quarterly cash dividend. The move marked the sixth consecutive yearly hike since the company initiated its dividend payment policy. The new dividend rate of $0.4025 per share will be payable on August 15 to shareholders of record as of July 25.

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Third-quarter outlook

Delta has provided impressive guidance for its third quarter. Its guidance is far higher than analysts’ expectations and suggests a significant YoY improvement. Delta President Glen Hauenstein said during the company’s second-quarter earnings release, “With record passenger loads, customer satisfaction and $1 billion in revenue growth for the June quarter, demand for Delta’s customer-focused product and service has never been stronger. Our third quarter is off to a great start with a new highest revenue day on record on July 7th.”

Delta expects its unit revenue to rise in the range of 1.5%–3.5% and its passenger capacity to rise ~4% in the third quarter. The company expects its bottom line results to continue to benefit from increased revenue contributions from premium products and non-ticket sources, route realignment, cost-control measures, and the One Delta initiative. In the third quarter, the company expects to have a pretax margin of 14.5%–16.5%, a substantial improvement from 13.7% in the previous year’s quarter.

Delta expects its third-quarter adjusted EPS to be in the range of $2.10–$2.40 (with a midpoint at $2.25), which signifies a YoY rise of 15%–31%. Delta’s earnings projection came in higher at the midpoint than analysts’ consensus estimate of $2.18.

The airline’s fuel costs are forecast to be $1.95–$2.15 per gallon, lower than the $2.21 it incurred in the previous year’s quarter. It expects its ex-fuel cost per available seat mile to rise in the 1%–2% range YoY.

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Buoyed by an overwhelming first-half performance and customer-focused initiatives, the company has raised its revenue growth guidance range for 2019 to 6%–7% from 5%–7%. Delta now anticipates its adjusted EPS for the year to be $6.75–$7.25, reflecting a YoY rise in the range of 19%–28%. Analysts expect it to have EPS of $6.98.

The majority of US airlines will report their second-quarter earnings results in the coming weeks. Analysts expect the second-quarter EPS of United Airlines (UAL), Southwest Airlines (LUV), and American Airlines (AAL) to rise 26.3%, 6.4%, and 7.9%, respectively, YoY.

Stock performance

With its YTD (year-to-date) return of 19.2%, Delta has been one of the best performers in the airline industry. The stock has outperformed the gains of the iShares Transportation Average ETF (IYT) and the Dow Jones Industrial Average, which have risen 12.2% and 15.1%, respectively, YTD. IYT, which invests in Dow Jones–listed US transportation stocks, has allocated 19% of its funds to the passenger airline industry.

Delta’s YTD return is much higher than those of its top peers. Shares of Southwest Airlines, American Airlines, and United Airlines are up 11.6%, 2.6%, and 6.9%, respectively, YTD.

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