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Will Delta (DAL) Beat on Q2 Earnings Amid Turbulence?

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It is a well documented fact that that high oil prices have prevented airline stocks from flying high this year. In fact, oil prices have increased more than 20% year to date. Notably, high oil prices do not bode well for companies in the airline space as fuel costs account for a significant chunk of their expenditures.

Like all other airlines, high fuel costs are hurting Delta Air Lines, Inc. (DAL - Free Report) too. We remind investors that even though this Atlanta, GA-based company marginally surpassed the Zacks Consensus Estimate for earnings in the first quarter, the metric declined 3.9% year over year. The bottom-line contraction can be mainly attributed to high fuel costs. Moreover, the first-quarter earnings beat failed to translate into any strength for its stock, as evident from its year-to-date plunge of over 11%. 

Year- to- Date Price Performance

 

With oil prices continuing to move northward, the stock might disappoint after the company releases second-quarter results on Jul 12. In fact, the stock could lose further value on dismal results.

However, an earnings beat doesn't look very difficult for Delta in the second quarter as the Zacks Consensus Estimate is pretty conservative at $1.75, after a number of downward revisions over the last couple of months.

Our quantitative model too points at an earnings beat in the soon-to-be-reported quarter. Here's why:

Delta has the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or better — for increasing the odds of an earnings surprise.

Zacks ESP: Delta has an Earnings ESP of +1.36% as the Most Accurate estimate is $1.77 while the Zacks Consensus Estimate is pegged 2 cents lower. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Delta carries a Zacks Rank #3. Note that stocks with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 have a significantly higher chance of beating earnings estimates. You can see the complete list of today’s Zacks #1 Rank stocks here.

Conversely, Sell-rated stocks (Zacks Rank #4 or 5) should never be considered going into an earnings announcement.

The combination of Delta’s Zacks Rank #3 and a positive ESP makes us reasonably confident of an earnings beat.

Delta Air Lines, Inc. Price and EPS Surprise

 

Delta Air Lines, Inc. Price and EPS Surprise | Delta Air Lines, Inc. Quote

Factors Likely at Play

Similar to the last reported quarter, high fuel costs are likely to act as the key dampener to Delta’s earnings in the second quarter. We note that oil prices increased 14% in the April-June period. The Zacks Consensus Estimate for second-quarter average fuel price (mainline: net of hedging gains) stands at $2.14 per gallon, much higher than the $2.01 reported by the carrier in the first quarter of 2018.

In fact, Delta anticipates fuel costs to be even higher and lie in the $2.20- $2.25 range in the soon-to-be-reported quarter. Apart from high fuel costs, expenses on the labor front are expected to limit bottom-line growth. The carrier envisions non-fuel unit costs to rise approximately 3% year over year. The Zacks Consensus Estimate for second-quarter non-fuel unit costs stands at 10.25 cents, more than 10.24 cents reported a year ago.

However, the company is expected to perform well on the unit revenue front. The airline behemoth expects total revenue per available seat mile (TRASM) to increase between 4% and 5% year over year in the second quarter. The bullish forecast is based on the strong demand for air travel across all entities in the leisure and the business segments.

The Zacks Consensus Estimate for second-quarter passenger revenue per available seat mile (PRASM) is pegged at 15.27 cents, above 14.74 cents reported in the first quarter of 2018.

Stocks That Warrants a Look

Investors interested in the broader Transportation sector may check out CSX Corporation (CSX - Free Report) , SkyWest, Inc. (SKYW - Free Report) and J.B. Hunt Transport Services Inc. (JBHT - Free Report) , awaiting earnings releases this time around:

CSX has an Earnings ESP of +2.17% and a Zacks Rank of 2. The company is scheduled to announce second-quarter results on Jul 17.

SkyWest has an Earnings ESP of +0.86% and a Zacks Rank #3. The company is scheduled to release second-quarter results on Jul 26.

J.B. Hunt has an Earnings ESP of +0.95% and a Zacks Rank of 2. The company will report second-quarter 2018 results on Jul 16.

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