December 27, 2011

Delta earnings likely to soar above expectations

by Alpha Now Research Team

The StarMine research team at Thomson Reuters continues with its quest to identify those companies it expects to be big winners or losers when it comes to beating fourth-quarter earnings estimates. Following its prediction that AT&T would be among the latter (see this report for details), StarMine researchers are now predicting that Delta Airlines (DAL) is likely to outperform current analysts’ earnings estimates despite the woes that have battered the airline stocks in 2011.

StarMine analytics show that DAL has a positive Predicted Surprise (a measure unique to Thomson Reuters and described in the box below) for fourth quarter earnings per share. The magnitude of this Predicted Surprise suggests that the company may report earnings that are higher than current earnings estimates when it reports its results on 16 January 2012, or, that analysts will continue to raise their estimates before that report date. In either case, the earnings news flow is likely to be positive.

Over the course of the last 30 days the I/B/E/S consensus for DAL’s earnings has risen 36% to 35 cents a share. But that is still two cents below the SmartEstimate of 37 cents a share, resulting in a Predicted Surprise of 4.1%. Also, there are two “bold” estimates of $0.40, defined by StarMine as estimates published by an analyst to whom StarMine has awarded five stars for their accuracy and timeliness. When one of these individuals steps out of line to issue an estimate that differs significantly from the consensus, we want to pay attention: the reason these individuals are so highly rated is that they have so often been accurate. Here, we have two corroborating viewpoints, making the case that earnings will beat the forecast an even stronger one.

Why all the optimism on the part of analysts? These individuals note that, despite the industry’s woes, DAL has captured a growing share of the higher-margin business travel market. They also point to DAL’s newer fleet and the better job that the airline has done at containing costs as factors that contribute to higher earnings. Despite that optimism, it’s still possible that analysts haven’t yet finished raising their estimates for DAL. The StarMine Analyst Revisions Model (ARM) assigns DAL a strong score of 93 on a 1-100 scale, placing the company firmly in the top decile of companies in the region. That high score indicates that there is strong positive analyst revisions momentum that is likely to continue.

Airline companies have recently been in the news, as the European Union enacted a new law levying a tax on carbon emissions on non-European carriers. (In late December, the European Court of Justice rejected a challenge to the law by US airlines such as DAL and declared it expects foreign carriers to abide by the court ruling and start paying the carbon tax beginning in January. U.S. officials contend it’s up to a United Nations civil aviation body to make a final ruling.) If the tax is imposed, carriers like DAL likely will have to increase their fares and pass much of the cost burden on to its customers. (To read more on this refer to this Reuters News article.) But this doesn’t affect DAL’s earnings for the fourth quarter of 2011. Indeed, to the extent that investors focus on this headwind, the opportunity for the expected positive earnings surprise on January 16, 2012, may have an even bigger impact.


SmartEstimates: Thomson Reuters StarMine Professional quantitatively analyzes the earnings estimate accuracy of sell-side analysts and uses this information to create proprietary SmartEstimates®. SmartEstimates help you better predict future earnings and analyst revisions with estimates that place more weight on recent forecasts by top-rated analysts.

Predicted Surprise %: The Predicted Surprise% is the percentage difference between the SmartEstimate and the I/B/E/S consensus estimate. When SmartEstimates diverge significantly from consensus, it serves as a leading indicator of the direction of future revisions and/or surprises. In aggregate, this indicator gets earnings surprises directionally correct 70% of the time.


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