You always like it when things play out. Classic example: the airlines. Delta (DAL) this morning reported an outstanding quarter on every metric: passenger growth, lower costs, chiefly jet fuel, which went from $2.93 a gallon to $1.33, and a huge buyback with all that excess cash. In fact, if you extrapolate the latter, you could see 8% of the shares bought back this year.
But there are two other reasons that really made this quarter stand out and are why I have been pounding the table so hard on these stocks for ages: the discipline of the industry itself, where the companies are being very smart about not boosting capacity -- amazing restraint given how much they make per ticket -- and the lack of satisfaction with their earnings.
That's right, despite how robust the numbers are, the company wasn't at all happy with unit revenues, which fell 4.5%. They expect it will fall less than that this quarter, but there was no smug satisfaction over a wildly profitable quarter. The opposite -- these guys are running scared like they are losing money, not walking around fat and happy because they are making money.
That's why it is so counterintuitive that this stock sells at a meager 8x this year's earnings and 7x next year's figures. Frankly, I find that outlandish, but I totally understand that this industry has a long history of no discipline when it comes to pricing or capacity and believers are still few and far between. That's OK, the company will just keep returning capital to shareholders until the cows come home if it doesn't get the respect it deserves. Of course, this quarter reverberated through the entire industry and sent the whole group soaring, just as it should.
Speaking of things playing out, you know I was bummed when Alcoa (AA) reported and had that setback at a key aerospace division, Firth Rixson. The swing in profits was nightmarish. That said, the cost takeouts were amazing companywide and it is splitting into a commodity company with good cash flow and a highly engineered company that has a ton of aerospace. When you look at the comparables with the aerospace business, you are talking about Precision Castparts, which Warren Buffett bought out at a price that would make Alcoa worth so much more that it would seem fanciful, as well as Honeywell (HON) and United Technologies (UTX), which fly high every day.
The stock flew up in anticipation of the quarter and I sure didn't want to see that. People who bought that day no doubt felt aggrieved, until today -- that is when the stock broke out above where it traded on earnings day.
Why? Because of a genuine belief that for this company, like so many of the commodity companies out there, this is the last bad quarter. Is it? I don't know. Some of the minerals and mineral-related companies are going up way too fast even as their raw goods aren't appreciating. But this one has a "last quarter before the split-up" thesis that begins now, and I think that makes it compelling.
Just understand, though, what's really happening here. Companies that do well are being rewarded with higher stock prices, and that's something that hasn't happened in a very long time and only started when the market bottomed in February. It's a very good sign for an earnings season that was supposed to be the worst in seven years, at least according to the pundits who never bother to do any work but love to opine just, I imagine, to hear themselves talk.