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Will Low Fuel Costs Help Delta (DAL) Top Earnings in Q3?

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We expect airline behemoth Delta Air Lines, Inc.DAL to report strong numbers when it reports financial results for third-quarter 2015 on Oct 14, 2015. With results scheduled to be declared prior to the commencement of trading on that day, Delta will kick off the earnings season in the airline sector.

Why a Likely Positive Surprise?

Our proven model shows that Delta is poised to beat earnings this quarter as it has the right combination of 2 key components:

Zacks ESP : The carrier currently has an Earnings ESP of +1.18%. This is because the Zacks Consensus Estimate is $1.70 per share, while the Most Accurate Estimate is pegged higher at $1.72.

Zacks Rank : Delta carries a Zacks Rank #2 (Buy). Note that stocks with a Zacks Rank #1 (Strong Buy), 2 or 3 (Hold) have a higher chance of beating earnings. 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 #2 and earnings ESP of +1.18% makes us confident of an earnings beat at the company.

What's Driving the Better-than-Expected Earnings?

Delta boasts a solid earnings history, having delivered positive earnings surprises in each of the last four quarters, with an average beat of 3.02%. The company, along with peers such as Southwest Airlines Co. LUV , is benefiting considerably from persistent weak oil prices . Delta's results in the third quarter of the year are, once again, likely to be positively impacted by low fuel costs.

Fuel costs account for a major chunk of an airline's operating expenses. Consequently, cheaper oil price should boost Delta's bottom line in the quarter. The company projects average fuel price per gallon (inclusive of taxes, settled hedges etc.) for the third quarter in the band of $1.80 to $1.85, which represents a significant reduction from the year-ago figure of $2.90. Revenues are expected to be pressurized by a strong dollar yet again in this quarter.

Meanwhile, we are impressed by Delta's strong balance sheet. The carrier's efforts to enhance shareholder wealth through dividends and buybacks are encouraging.

For the third quarter of 2015, the carrier expects operating margin in the range of 20% to 21%, which reflects an improvement from the comparable figure of 15.8% recorded a year ago.

System capacity is expected to increase approximately by 3%. Unit revenue is projected to decline in the band of 4.5% to 5.5%, mainly due to a strong dollar.

Other Stocks to Consider

Delta is not the only carrier looking up this earnings season. The following airline stocks are also likely to beat earnings in the upcoming quarter:

Alaska Air Group, Inc. ALK , the parent company of Alaska Airlines, will unveil its third-quarter earnings numbers on Oct 22, before market opens. The company carries a Zacks Rank #2 and has an earnings ESP of +0.98%.

American Airlines Group AAL has an earnings ESP of +4.94% and a Zacks Rank #2. The company will report results on Oct 23.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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