The Zacks Analyst Blog Highlights: Delta Air Lines, United Continental Holdings, AMR Corporation, Gannett Company and The New York Times Company

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Jul 18, 2011, 09:30 ET

CHICAGO, July 18, 2011 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: Delta Air Lines Inc. (NYSE: DAL), United Continental Holdings Inc. (NYSE: UAL), AMR Corporation (NYSE: AMR), Gannett Company Inc (NYSE: GCI) and The New York Times Company (NYSE: NYT).

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Here are highlights from Friday's Analyst Blog:

Earnings Preview: Delta Air Lines

Delta Air Lines Inc. (NYSE: DAL), the second largest U.S. airline, is slated to release its second quarter 2011 earnings on July 18. The current Zacks Consensus Estimate for the second quarter is 49 cents, representing a 25.17% decline from the year-ago level.

Delta had positive surprises averaging 4.34% over the last four quarters. The second quarter is expected to be profitable owing to higher revenues, which would largely offset the surge in fuel prices.

Despite the lingering uncertainty in U.S. recovery as well as debt concerns in Europe, the demand for air travel has rebounded to some extent after the March 11 catastrophe. Delta now expects the disaster in Japan to hurt total revenue by $125 million in the second quarter compared with the previous expectation of $150 million.

Second quarter unit revenue is projected to grow 10% year over year. Fuel cost is estimated at $3.23 per gallon, down from the prior expectation of $3.26 per gallon. Further, Delta expects operating margin in the range of 6.5–7%, down from previous outlook of 7–9%.

First Quarter Flashback

Delta Air Lines reported first quarter adjusted loss of 38 cents that outpaced the Zacks Consensus Estimate of a loss of 50 cents on large fare hikes partially offset by higher fuel costs. However, adjusted net loss was wider than the year-ago loss of 23 cents. The deterioration from the year-ago level could be due to weak traffic in Japan resulting from the March 11 earthquake and tsunami.

The company reported improved revenue owing to high traffic and increased capacity, and surpassed the Zacks Consensus Estimate. Airlines traffic, measured in billions of revenue passenger miles, inched up 1% year over year. Capacity or available seat miles grew 5% and load factor (percentage of seats filled with passengers) fell 310 basis points year over year.

Operating expense rose due to higher fuel expense, employee wage increases, maintenance volumes, and capacity and revenue-related expenses.

Agreement of Analysts

Estimates for the second quarter have been trending downward over the last 7 and 30 days. In the last 30 days, 6 analysts out of 11 have made downward revisions while two analysts moved in the opposite direction. Over the last 7 days, 2 analysts reduced their estimates while none made a positive revision.

For fiscal 2011, out of 9 analysts, 4 revised their estimates downward over the last 30 days and 2 made similar revisions over the last 7 days. Three analysts made positive revisions to the estimates over the last 30 days while one revised the estimate upward over the last 7 days.

For the past several months, air carriers are struggling with rising fuel prices. Soaring fuel prices in the airline industry are expected to lift Delta's 2011 fuel expenses by $3 billion or 35% over 2010.

In order to alleviate the cost pressure, the carriers are passing the increased cost to customers in the form of fare hikes and are cutting capacity. Delta Air Lines plans to trim its capacity by 4% post Labor Day, retire less fuel-efficient planes and remove 140 aircraft by the end of next year. In addition, Delta offers voluntary buyouts to 55,000 employees.

The analysts with negative earnings estimate revisions believe the company's capacity reduction plan might hurt its profitability. The company is investing substantially to enhance customer service that might adversely affect its free cash flow levels. Moreover, the company's current debt level is high in comparison to its peers and historical levels.

On the other side, the analysts making positive revisions believe Delta Air Lines will generate solid profits going forward on increasing fares, improved ancillary revenues as well as hedging strategies. Delta Air Lines is currently 49% hedged at prices equaling $3.26 per gallon for the second quarter.

Delta Air Lines is progressing on improving ancillary revenues by offering expanded products and services both on board and on the ground that are expected to yield additional revenue of $1 billion by 2013. Further, ancillary revenues, such as expanded seat-related offerings and the launch of international premium economy product "Economy Comfort" in June, will generate $150–$200 million in additional revenue in 2011. Moreover, Delta Air Lines continues to improve its balance sheet by reducing its net debt to $10 billion by 2013.

Magnitude — Consensus Estimate Trend

The Zacks Consensus Estimate for the second quarter fell by a penny over the last 7 days and 6 cents over the last 30 days to 49 cents.

The Zacks Consensus Estimate for fiscal 2011 is $1.24. The estimate was down by 4 cents and 9 cents over the last 7 days and 30 days, respectively, and represents a substantial 27.29% decline annually.

Our Analysis

We believe Delta Air Lines is in a superior position relative to its largest rivals United Continental Holdings Inc. (NYSE: UAL) and AMR Corporation (NYSE: AMR) to report solid second quarter results. United Continental expects to report lower-than-expected unit revenue growth of 8.3–9.3%. American Airlines' revenue could be hurt by $60 million due to a spring hailstorm at American's Dallas-Fort Worth hub. The company expects its unit revenue to increase 4.5–5.5% in the second quarter.

We are currently maintaining our long-term Neutral recommendation on the stock. For the short term, the stock retains a Zacks #3 (Hold) Rank.

Earnings Preview: Gannett

Gannett Company Inc. (NYSE: GCI), the publisher of the nation's largest-selling daily newspaper USA Today, is scheduled to report its second-quarter 2011 financial results on July 18, 2011. The current Zacks Consensus Estimate for the quarter is 57 cents a share. For the quarter under review, revenue is $1,329 million, according to the Zacks Consensus Estimate.

First-Quarter 2011, a Synopsis

Gannett posted lower-than-expected first-quarter 2011 results, reflecting soft publishing advertising demand, and absence of advertising related to Olympics and Super Bowl as well as political spending. However, these were offset, to some extent, by effective cost management.

The quarterly earnings of 41 cents a share missed the Zacks Consensus Estimate by a penny and fell 16.3% from last year's 49 cents. On a reported basis, including one-time items, earnings came in at 37 cents a share, down 24.5% from 49 cents delivered in the year-ago quarter.

Gannett's total revenue dropped 3.7% to $1,251.3 million from the prior-year quarter due to a fall in revenue across Publishing and Broadcasting segments, partially offset by gain at Digital segment. However, total revenue came ahead of the Zacks Consensus Estimate of $1,247 million.

Second-Quarter 2011 Zacks Consensus

Analysts considered by Zacks, expect Gannett to post second-quarter 2011 earnings of 57 cents a share. The current Zacks Consensus Estimate reflects a decline of 6.6% from the prior-year quarter earnings. The current Zacks Consensus Estimate for the quarter ranges between 54 cents and 60 cents.

Zacks Agreement & Magnitude

Out of the 8 analysts following the stock, one analyst lowered the estimate in the last 7 and 30 days, resulting in a downward movement of the Zacks Consensus Estimate by a penny to 57 cents a share for second-quarter 2011.

Positive Earnings Surprise History

With respect to earnings surprises, Gannett has topped as well as missed the Zacks Consensus Estimate over the last four quarters in the range of -2.4% to 17.3%. The average remained at 5.9%. This suggests that Gannett has beaten the Zacks Consensus Estimate by an average of 5.9% in the last four quarters.

Our View

The publishing industry has long been grappling with sinking advertising revenue and the recent global economic meltdown has worsened the situation. This downturn followed a longer-term secular decline as more readers choose to get news online for free, making the print-advertising model increasingly redundant. Moreover, the ad rates of print are typically more expensive than the web.

In an effort to offset declining revenue and shrinking market share, publishers are slashing costs, and Gannett remains no exception.

Gannett is diversifying its business by adding new revenue streams to make it less susceptible to economic conditions. The company is also streamlining its cost structure, strengthening its balance sheet and rebalancing its portfolio. The company is witnessing higher digital revenues.

However, the company's high dependence on advertising revenue, which is driven by the health of the economy, remains a potential threat.

We have a long-term 'Neutral' rating on the stock, given a sluggish economic recovery and a soft advertising spending environment. Moreover, Gannett, which competes with The New York Times Company (NYSE: NYT), holds a Zacks #4 Rank that translates into a short-term 'Sell' recommendation.

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