Delta Air Lines, Inc. Earnings Fly Higher, but Will the Ride Last?

Delta grew its earnings by more than $1 billion last year. How much more upside is there?

Jan 22, 2014 at 6:01PM

Images

On Tuesday morning, Delta Air Lines (NYSE:DAL) reported strong Q4 earnings. Earnings per share of $0.65 came in just ahead of the analyst consensus, boosted by solid demand and a year-over-year drop in fuel prices.

All in all, Delta had a spectacular year in 2013. Net income grew by approximately $1.1 billion to $2.7 billion as unit revenue continued to grow and the company's cost containment measures started to kick in. This helped Delta stock more than double during 2013!

DAL Chart

Delta 2013 Stock Chart, data by YCharts.

Delta expects to make further progress in 2014 through initiatives such as its new transatlantic joint venture with Virgin Atlantic and its domestic refleeting (which involves replacing 50-seat regional jets with larger, more cost-effective planes). However, by the end of this year Delta could be approaching its "ceiling." Beyond 2014, it could have trouble hitting its earnings growth target.

Momentum continues
Delta continued its revenue momentum in Q4, despite the ongoing impact of the weak yen on flights to and from Japan. Delta's domestic mainline operations were by far the strongest part of its business, delivering a 6.6% increase in unit revenue. Meanwhile, fuel prices declined year over year and non-fuel unit costs grew just 1.4% before profit sharing. These factors caused adjusted EPS to more than double year over year from $0.28 to $0.65.

For the current quarter, Delta expects an operating margin of 6%-8%, which implies roughly 300 basis points of margin expansion (similar to what Delta reported last quarter ). Once again, Delta is expecting unit revenue growth around 3% while fuel prices will decline and non-fuel cost growth will remain modest.

Hitting the targets
The biggest risk for Delta shareholders at this point is that the company could be close to peaking. At its investor day last month, management laid out a set of long-term financial targets. Delta's long-term goals include: a 10%-12% operating margin; annual EPS growth of 10%-15%; a 15% return on invested capital; and operating cash flow of more than $5 billion.

Delta's 2013 performance put it very close to hitting those targets. With its expected earnings and margin growth this year, it could end up beating its long-term goals. Excluding onetime restructuring costs, Delta's 2013 operating income totaled $3.8 billion, for an operating margin of 10% -- at the lower end of Delta's long-term-target range.

Moreover, Delta achieved a return on invested capital of 15% last year, thus hitting its long-term target. Operating cash flow was $4.8 billion, just below the long-term target of at least $5 billion.

Based on Delta's projections for strong profit growth this year, it will be nearing the high end of its operating margin target range (10%-12%). It will exceed its return on invested capital target, on a pre-tax basis, although it may fall a little short of its 15% target after factoring in a non-cash tax accrual.

Unless Delta's financial goals are overly conservative, the solid profit growth of 2013 and 2014 may not continue into 2015. Delta executives have repeatedly committed to keeping capacity growth below the rate of GDP growth, so organic growth won't be a profit driver. If 12% is really the maximum feasible operating margin, it will be hard for Delta to generate double-digit EPS growth after 2014.

The investor's dilemma
Delta has been one of the best-performing stocks in the market since late 2012. Strong demand for air travel and receding cost pressures have catalyzed strong profit growth. Investors have become optimistic about the future, too, driving up Delta's earnings multiple.

Ironically, as Delta approaches its long-term, financial goals, the stock may become less attractive. Over time, I do expect Delta to become a reliable dividend stock. However, there may be a period of adjustment later this year or next year as earnings start to plateau and investors who were betting on the company's turnaround look for greener pastures.

Solid dividend stocks will protect your portfolio
Delta Air Lines is on the way to becoming a solid dividend stock, but it's not there yet. If you're a Delta investor sitting on big gains from the past year, it may be time to rebalance your portfolio with high-performing dividend champions. Luckily for you, The Motley Fool's top analysts have compiled a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, just click here now!

Fool contributor Adam Levine-Weinberg has no position in any stocks mentioned, and neither does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers