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Delta Struggles With Numerous Headwinds: Downgraded to Sell


On Jun 13, 2018, we issued an updated research report on Delta Air Lines, Inc. DAL. The stock has been downgraded to a Zacks Rank #4 (Sell) from a Zacks Rank #3 (Hold). Going by the Zacks proven model, the Sell-rated stocks (4 or 5) are likely to underperform the broader market over the next one to three months.

Reasons Behind the Downgrade

Delta has been grappling with troubles for quite some time now. The winter storm, Grayson, in January 2018 and the back-to-back hurricanes in 2017, wreaked havoc for the carrier, forcing it to cancel multiple flights. This hurt the carrier’s top line significantly. In fact, the company’s first-quarter 2018 results were also hampered due to these natural calamities. Notably, Delta’s bottom line also contracted 3.9% on a year-over-year basis. High fuel costs have also added to the downturn.

The fuel cost burden is still a major headwind for the company as oil prices have been trending up lately with almost 10% increase so far this year. Rising fuel prices are anticipated to affect the company’s bottom-line growth in the second quarter of 2018. As a matter of fact, the carrier recently raised its second-quarter view on fuel costs per gallon. The metric is now projected between $2.20 and $2.25. Previously, the estimate was in the $2.07-$2.12 range.

Apart from fuel prices, high labor costs are expected to hit the company’s bottom line in the current quarter. Notably, non-fuel unit costs are likely to rise approximately 3% year over year, up from the prior forecast of a climb in the 1-3% range.

Further, due to cost concerns, the company slashed its earnings per share guidance for the second quarter. The metric is now anticipated in the range of $1.65-$1.75, much lower than the former prediction between $1.80 and $2. The Zacks Consensus Estimate for current-quarter earnings stands at $1.77. Moreover, pretax margin is now projected between 13% and 14% in the concerned quarter. Earlier outlook was in the band of 14-16%.

Further adding to the company’s woes are its fears of capacity overexpansion. This is because load factor (percentage of seats filled by passengers) at the carrier contracted 40 basis points in May as capacity expansion of 3.5% exceeded traffic growth (of 2.9%. This key metric also declined 20 basis points in April. Moreover, load factor decreased 10 basis points on a year-to -date basis. This drop in load factor is worrisome and does not bode well for the stock.

Shares of Delta have declined 3% in the last three months due to these downsides.

Stocks to Consider

Some better-ranked stocks in the broader Transportation sector are GATX Corporation GATX, SkyWest, Inc. SKYW and Expeditors International of Washington, Inc. EXPD. While GATX and SkyWest carry a Zacks Rank #2 (Buy), Expeditors sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Shares of GATX, SkyWest and Expeditors have rallied more than 18%, 4% and 20%, respectively, in the past six months.

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