Hudson Securities maintained their buy rating on Delta Air Lines (NYSE: DAL) following the results of a competitive capacity study which predicts that DAL will outperform its peers. Hudson also raised Delta’s price target to $20.00, up from $17.00.
Hudson analyst says, “Better earnings and valuation result from better demand as well as our 3/17/10 competitive capacity study which found competitive capacity exiting DAL’s markets at a greater rate vs peers…Our revised 2010E EPS of $1.70 (vs prior $1.35) is materially better vs FCC of $1.35/share; and our 1Q loss narrows to -$0.18/share (vs prior -$0.20)…It’s early in the cycle, but Delta is on its way to executing on its objective to report 10-12% operating margins. For perspective, a 10% margin (vs our current 8.6% margin in 2010) generates an untaxed EPS of $2.25 in our model while a 12% margin yields $3.15/share. The carrier is in the midst of implementing key revenue mgmt & marketing initiatives which in the context of a demand recovery and disciplined industry capacity provide revenue support looking ahead. Separately, as competitors labor costs reset higher, DAL’s cost advantage widens thereby leaving the carrier better positioned to capture higher margins vs peers…Thus, our newly introduced 2011E EPS of $2.45 factors in DAL earning a 9.3% operating margin driven by a 3.5% improvement in pricing on flat capacity (e.g. PRASM +3.5%) and jet fuel at $95 WTI equivalent.”
