The Zacks Analyst Blog Highlights:Delta Air Lines, United Continental Holdings, Southwest Airlines, Deutsche Bank and UBS AG

Jul 26, 2012, 09:30 ET from Zacks Investment Research, Inc.

CHICAGO, July 26, 2012 /PRNewswire/ -- 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), Southwest Airlines Co. (NYSE: LUV), Deutsche Bank AG (NYSE: DB) and UBS AG (NYSE: UBS).


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Here are highlights from Wednesday'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 2012 earnings on July 26. The current Zacks Consensus Estimate is pegged at 67 cents for the second quarter, representing a substantial 56.35% increase from the year-ago quarter.

Looking at surprises, Delta had average positive surprise of 9.68% in the trailing four quarters. In the year-earlier quarter, the company had surprised us by reporting 2.27% downside from our expectation.

Over the past two months, fuel price, the major threat to the company's profitability, has dropped to a certain extent, making airline operations less expensive.

First Quarter Flashback

Though Delta's adjusted earnings per share were at par with the Zacks Consensus Estimate, earnings on a GAAP basis climbed year over year on the back of fare hike actions, cost-cutting measures and fuel hedging gains that offset surging fuel prices.

Revenue improved on the back of strong unit revenue, particular in Atlantic and Pacific. Airlines traffic grew slightly from the year-ago quarter with decline in capacity (or, available seat miles) and increase in load factor (percentage of seats filled with passengers).

Operating expense rose mainly due to higher fuel expense and ancillary business expenses.

On the liquidity front, the company has attained approximately $5 billion of debt reduction over the past two years to $12.2 billion at the end of first quarter. Management is on track to minimize debt to $10 billion by 2013.

(Read our full coverage on this earnings report: Delta Meets, Guidance Firm)

Second Quarter Outlook

Last month, Delta Air Lines announced that it foresees $155 million in losses from fuel hedging strategies in the second quarter. The company now estimates fuel price to rise to $3.37 per gallon from the previous forecast of $3.28 per gallon due to hedge losses that were settled in May and June.

Delta Air Lines was 70% hedged for the second quarter at a jet fuel price of $3.05–$3.40 per gallon using collars and call spreads. As a result, the company expects to record operating losses in the quarter with negative 1% margin after accounting for the hedges and other special charges.

However, on a non-GAAP basis, Delta still expects operating margin in the range of 8–10% and consolidated unit cost, excluding fuel, to grow 3–4% year over year. Additionally, the company expects both domestic and international flying to decline 1–2% year over year.

Further, second quarter unit revenue is expected to grow 8% year over year thanks to growing business travel demand and flight expansion in the New York market. The addition of novel features to its services as well as introduction of new products will also contribute to revenue increase.

Agreement of Analysts

Estimates for the second quarter have been trending downward over the last 30 days with 10 out of 13 analysts making downward revisions. None of them moved in the opposite direction.

The analysts turned negative as Delta expects to record operating loss due to fuel hedging losses. Though the drop in fuel prices of late has helped the carrier to a certain extent, it indicates a slowing economy and consequent fall in global air travel demand. The falling fuel cost also increases the hedge losses.

For fiscal 2012, estimates reflect a positive bias over the last 30 days, as 8 out of 13 covering analysts have revised their estimates upward while 3 made downward revisions.  

The analysts remained impressed with Delta's initiatives to improve revenue while lowering overall cost. The company is progressing well on improving ancillary revenues by adding new features to its services as well as expanding new products, which are enhancing its value and profitability.

Moreover, Delta Air Lines believes 2012 will remain profitable with substantial improvements from last year on the back of growing revenues, capacity cuts, higher ticket prices and better customer satisfaction.

Magnitude — Consensus Estimate Trend

The magnitude of revisions for the second quarter remained stable over the last 7 days at 67 cents but went down by 13 cents over the last 30 days.

The Zacks Consensus Estimate for fiscal 2012 is $2.36, down 3 cents over the last 7 days but was up by a nickel over the last 30 days.

Neutral Recommendation

Despite the uncertain economic conditions, we expect Delta to exhibit strong revenue and earnings on the back of improving services, new product launches and reduced operating expenses — fuel and non-fuel costs. Additionally, the company is expanding networks in both domestic and international markets as well as de-leveraging its balance sheet in order to brighten long-term prospects.

Nevertheless, we remain on the sidelines due to fuel price volatility, competitive threats from major rivals like United Continental Holdings Inc. (NYSE: UAL) and Southwest Airlines Co. (NYSE: LUV), as well as unionized workforce and heavy investments, which might weigh on the bottom line.

We are currently maintaining our long-term Neutral recommendation on the stock. For the short term, the stock retains a Zacks #2 (Buy) Rank.

Weak Euro Hits Deutsche Bank

Hurt by a weakening Euro, Deutsche Bank AG (NYSE: DB) has warned of discouraging second quarter results. The company, which is scheduled to report its complete result on July 31, has come up with a preliminary update on its second quarter results yesterday.

Currently, Deutsche Bank projects its net income for the quarter to be €700 million ($845 million), down from €1.2 billion in the prior-year quarter. Its pre-tax profit is estimated to be around €1.0 billion, substantially down from €1.8 billion earned in the prior-year +quarter.

Deutsche Bank's earnings figure is based on second quarter total revenues of €8.0 billion that came below the prior period level of €8.5 billion. Notably, a weak Euro which has adversely impacted its U.S. dollar and pound sterling cost base resulted in non-interest expense of €6.6 billion, ahead of the prior year period's €6.3 billion. The company set aside €400 million for credit provisions, slightly below the year-ago quarter level of €464 million.

Even in the midst of such circumstances, Deutsche Bank confirmed its simulated, pro forma, Basel III fully phased-in Core Tier 1 capital ratio of 7.2% at the beginning of 2013. It will scale back its risk-weighted assets to mitigate the impact from lower earnings. The company's core Tier 1 capital ratio was 10.2% at the end of the second quarter, up from 10.0% at the end of the prior quarter.

Our Take

Deutsche Bank has adopted several strategic initiatives including the repositioning of its core business and bolstering of its capital levels. While such initiatives augur well, costs associated with such efforts cannot be denied.

Hurt by the Euro-zone debt crisis, Deutsche Bank experienced trading revenue declines in the past. Besides a drop in revenues, in the second quarter, the weak Euro has added to its woes. As a matter of fact, Deutsche Bank is also facing scrutiny for its alleged participation in interest rate manipulation, including Libor.

Given the stressed operating environment, we believe that any significant improvement in its earnings in the upcoming quarters would remain elusive. We now look forward to the next week, when UBS AG (NYSE: UBS) is also scheduled to release its earnings results on July 31.

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