Delta Earnings Outlook Better Than Initially Thought, Deutsche Bank Says

• Shares of Delta Air Lines, Inc DAL have been volatile in 2016 and are up 3 percent year-to-date.
• Deutsch Bank’s Michael Linenberg maintained a Buy rating on the company, while raising the price target from $55 to $68.
• Delta’s new and ongoing cost cutting initiatives are expected to drive robust earnings growth in the future, Linenberg stated.

Delta’s management has pushed back its expectations of achieving a flat to positive unit trajectory from 2015 to the summer of 2016. Analyst Michael Linenberg mentioned that the move was not surprising, given continued forex weakness, lower fuel surcharges and multiple downgrades to global GDP growth by the IMF and the World Bank.

Linenberg believes that Delta is poised to benefit from its equity stakes in Aeromexico, China Eastern, GOL and Virgin Atlantic and its longstanding ATI JV with Air France-KLM. The company views these relationships as the most capital efficient way of gaining a foothold in fast growing markets.

Delta is also looking at strategies that will help it to mitigate its tax burden since its NOLs are expected to run out by early 2018. Despite continuing to operate one of the oldest fleets, the company leads the industry across most operating statistics, the analyst noted.

“We believe this is accomplished by the company’s MRO expertise, which is now expanding to a parts business to help curb rising spare parts costs,” Linenberg wrote.

The EPS estimate for 2016 has been raised from $4.60 to $5.95 to reflect the CASM ex-fuel guidance of less than 2 percent growth, a lower fuel price and a lower tax rate.