Argus Lowers The Altitude Of Its Delta Airlines Price Target Following Q3 Results

Argus has cut its price target on Delta Air Lines, Inc. (NYSE: DAL) by $12 to $48 after the company reported lower third-quarter earnings. The firm also cut its fourth-quarter outlook for operating margin and system capacity.

Delta’s adjusted EPS fell to $1.70 from $1.74, but beat the consensus of $1.65. However, third-quarter revenue dropped 5.6 percent to $10.48 billion, and below the consensus of $10.53 billion. Passenger revenue per available seat mile also slipped 5.3 percent.

On the cost front, fuel costs declined by 22 percent to $1.422 billion and interest expense fell 21 percent to $95 million.

The company now projects a fourth-quarter operating margin of 14–16 percent, down from a prior forecast of 19–21 percent; and a 3–5 percent year-over-year decline in passenger unit revenue, versus earlier guidance of 4–6 percent decline.

Related Link: A Light At The End Of The Runway For Delta Air Lines

The airline also sees higher fuel costs of $1.60–$1.65 per gallon, up from a prior estimate of $1.52–$1.57 per gallon. It also projects a roughly 1 percent increase in system capacity, down from its prior forecast of 1–2 percent growth.

Rating And Further Justification

However, analyst David Coleman maintains his Buy rating on the stock, saying the company is benefiting from relatively low fuel costs, moderate capacity growth and rising demand for air travel.

Delta is also upgrading its fleet with new, fuel-efficient aircraft and expanding globally through partnerships with international carriers.

“We expect these efforts to lead to stronger results over time, and look for continued returns of capital to shareholders through dividend increases and share buybacks; however, we remind investors that airline stocks are volatile and suitable only for risk-tolerant investors,” Coleman highlighted.

Coleman expects 2016 revenue of about $40 billion, down slightly from last year, and sees a flat to lower operating margin due to rising fuel costs. The analyst also cut his 2016 EPS estimate to $5.49 from $5.94 and 2017 estimate to $5.60 from $6.04 based on management’s current outlook and the impact of higher fuel costs.

The analyst’s revised target of $48 implies a multiple of 8.7-times 2016 EPS estimate, still below the five-year historical average of 8.9 and the peer average of 11.5.

At the time of writing, shares of Delta fell 1.16 percent to $39.58.

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