For the first time since the third quarter of 2012, Delta Air Lines (DAL) missed earnings expectations, when it reported December-quarter earnings per share of $1.18 vs. analyst estimates of $1.19. Despite this, the EPS represents a more than 50% increase from the fourth quarter a year earlier. Additionally, on a trailing 12-month basis, Delta's posted its fifth consecutive quarter of (quarter to quarter) EPS growth.
Further examination of Delta's operating metrics shows that the company's return on assets continue to accelerate upward. After posting several consecutive quarters of 5%-6% ROA (calculated on a trailing four-quarter basis) in 2014, Delta's ROA approached 7% in the fourth quarter of 2015. Delta's earnings growth is clearly outpacing asset growth, which will provide some cushion to investors in the event of an economic downturn.
Free cash flow on a trailing 12-month basis increased from under $3 billion in the first quarter of 2015 to just under $5 billion in the fourth quarter. Delta's free cash flow is seasonal, with peaks in the second quarter and troughs in the fourth quarter. Despite this, the airline's quarterly free cash flow of $651 million is greater than the previous three fourth-quarter readings combined.
Equally impressive is that Delta is achieving these operational efficiencies without revenue growth, which remained flat to slightly down for the third consecutive quarter.
Investors should cautiously monitor Delta's revenue for further declines. In addition to this, airline industry trends are important to monitor. Airline performance (and consequently share prices) has been known to be pummeled in recessions.
One industry trend I'm eyeing is revenue miles. Using the Federal Reserve economic database, I've calculated industry revenue miles divided by revenue miles available (referred to as utilization). The 12-month moving average looks similar to Delta's revenue growth.
Overall, I believe Delta's stock has room to appreciate and I am expecting a share price of $60 to be attained sometime this year.