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Delta Outperforms on Strong 4th-Quarter Earnings

Before the market opened on Jan. 14, Delta Air Lines Inc. (NYSE:DAL) reported earnings for its fourth quarter of 2019, which ended on Dec. 31.

Delta is a major international airline headquartered in Atlanta. As of Jan. 14, it has a market cap of $39.99 billion. The airline posted revenue of $11.4 billion, an increase of 7% year over year after adjusting for its sale of DAL Global Services, a wholly-owned subsidiary that provides staffing services. Diluted earnings per share were $1.71, a 31% increase from the prior-year quarter. Analysts expected revenue of $11.35 billion and earnings per share of $1.40.


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Tailwinds

"2019 was a truly outstanding year on all fronts - the best in Delta's history operationally, financially and for our customers," CEO Ed Bastian said in the fourth-quarter earnings letter. "Our people, and their commitment to bringing best-in-class travel experiences to our 200 million customers, are the foundation for our success. I'm pleased to recognize their outstanding performance with a record $1.6 billion in profit sharing for 2019."

U.S. revenue growth was 7.7% compared to the prior-year quarter, 6% of which was attributed to higher capacity and 1.6% of which was attributed to higher revenue per passenger. Revenue also grew 0.8% in the Atlantic region and 6.7% in the Latin American region, though it declined 0.5% in the Pacific due to continued lack of success in China.

Partnerships and customer loyalty programs served as strong tailwinds for the airline's profitability. During the quarter, Delta announced an 11-year renewal of its contract with American Express (NYSE:AXP), making it easier for cardholders to earn miles. Its loyalty program, SkyMiles, signed up more new members than ever before, continuing the trend of adding more than a million Delta American Express cardholders for the third year in a row.

Total expenses for the company increased by 3.9% compared to the previous year and 6.9% during the quarter compared to the prior-year quarter. The increase was mostly due to expansion of the airline's capacity, $1.6 billion in profit sharing with employees and $225 million in share repurchases.

Expenses were offset by lower-than-expected fuel prices. Analysts had previously predicted that the cost of fuel would increase toward the end of the year as international marine fuel regulations tightened, but that ended up not being the case, and Delta saw a $315 million reduction in fuel costs for the quarter as prices dropped.

Valuation

The Peter Lynch fair value places the fair price for Delta shares at $131.21 apiece, which is higher than the Jan. 14 share price of $61.45. Another value calculation based on Peter Lynch's investing style, the Peter Lynch chart, also shows the stock as being undervalued.

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GuruFocus has assigned Delta a financial strength score of 5 out of 10 and a profitability score of 8 out of 10. It has a price-earnings ratio of 8.65, a three-year revenue growth rate of 8.1%, a three-year earnings per share without non-recurring items growth rate of 0.2% and a cash-debt ratio of 0.12%.

Delta's largest guru shareholder is Warren Buffett (Trades, Portfolio) with 10.96% of shares outstanding, followed by Vangurard Group Inc. with 7.14% and PRIMECAP Management (Trades, Portfolio) with 4.36%.

Buffett avoided owning airline stocks for a long time, even going so far as to write in 2007 that "if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down." In 2009, the "far-sighted capitalist" changed his opinion on the sector and its ability to be profitably utilized as a business asset, and thus began buying shares of airlines, starting with Delta.

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2020 guidance

For the first quarter of 2020, Delta provided guidance of year-over-year revenue growth of 5% to 7%, fuel prices of $2 to $2.20 and flat pre-tax margins.

The company expects revenue to grow in large part due to its strengthening global partnerships, particularly a strategic alliance with LATAM Airlines Group (NYSE:LTM) and the U.S. Department of Transportation's approval for anti-trust immunity between Delta, Air France-KLM (XPAR:AF) and Virgin Atlantic, which will allow the airlines to collaborate when setting prices within their joint network.

Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful analysis or consult registered investment advisors before taking action in the stock market.

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This article first appeared on GuruFocus.