Delta Still Worth $50/Share, But Investors Not Willing To 'Pay Up' For Fuel-Driven Growth

In a report published Thursday, Deutsche Bank analyst Michael Linenberg maintained a Hold rating on

, with a price target of $50. Analyst Michael Linenberg pointed that solid cost control and fuel savings resulted in a 170bps improvement in Delta's June quarter operating margin to 16.8 percent. "While we continue to forecast margin expansion and earnings growth through YE, investors remain unwilling to "pay up" for fuel-driven growth," Linenberg said. "Additionally, we expect PRASM trends to worsen before improving later in 2015 as capacity additions moderate, which coupled with Delta specific/industry headline risk (i.e. Delta's pilot negotiations and the DOJ investigation, respectively) should drive further share price performance volatility. As such, we are maintaining our Hold rating," Linenberg added. The company maintained its capacity outlook for 2015 while expecting to "stem the erosion in unit revenues by the end of the year." Delta's international revenues continue to be impacted by forex headwinds and reductions in fuel surcharges, the report stated, while adding that the company was on track to produce record profits. Linenberg believes that despite the PRASM pressures the company was "on track" to generating an estimated $1.9 bb and $1.1 bb in operating cash flow and free cash flow, respectively, "creating the opportunity for continued debt pay down and capital returns to shareholders." The EPS estimate for FY15 has been raised from $4.20 to $4.50 to reflect the better-than-expected June quarter result.