Delta Air Lines (DAL) fell to a sixteen-month low yesterday
after preannouncing fourth quarter results in conjunction with its December
The largest U.S. airline in terms of market capitalization raised its fourth quarter forecast for earnings to $1.25-1.30/share from $1.10-1.30/share and pre-tax margin to 10-11% from 9-11%.
However, investors were squarely focused on the company's soft top-line guidance. Delta guided for total unit revenue growth of 3%. At its Investor Day last month, the company had lowered its unit revenue growth forecast to 3.5% from 3-5%.
The company noted that overall demand remains healthy in business and leisure, but while close-in yield momentum continues, the pace of improvement in late December was more modest than anticipated.
A soft patch late in December doesn't all of a sudden spell doom for the airlines. A significant slowdown in top-line growth would present a headwind for airline stocks, but there is no real indication that is taking place just yet. A key concern is that airlines have in the past squandered the benefit from lower fuel prices by upping competition on fares.
At the Investor Day three weeks ago, Delta forecasted top line growth of 4-6% in 2019 (versus 7.5% growth this year), calling for solid demand for air travel despite slight deceleration in global GDP growth.
Management guided for EPS of $6.00-7.00, 100 basis points of pre-tax margin expansion, 1% non-fuel unit cost growth, and 4-6% top line growth with capacity up 3%. EPS guidance assumes Brent crude oil at $65-70/barrel versus the current price just above $48/barrel, so bias for EPS is to the upside, all else equal, but management will likely remain conservative with something like the price of oil, which they can't control.
Delta has yet to confirm a date for fourth quarter earnings, which means it will likely happen on Thursday, January 17 (as opposed to the 10th).
After preannouncing most fourth quarter metrics yesterday and guiding for fiscal 2019 last month, focus will be on first quarter guidance upon the company’s release. Yesterday, Cowen analyst Helane Becker estimated 2.1% unit revenue growth in the first quarter.
With an 8x forward P/E ratio, airline stocks trade at a significant discount to transportation (12x) and industrial (14x) sectors. Delta, American (AAL) and United (UAL) all trade at less than 5x EV/EBITDA while Southwest (LUV) trades at just over 5x.
Delta will argue that it deserves a higher earnings multiple after reporting its fifth straight year with at least $5 bln in operating profit. For now, the market remains more cautious on a sector that was considered un-investable before a major round of consolidation gave the group pricing power over the last decade.
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