It’s
a big week ahead for Wall Street, with still more earnings on deck, issues in
Ukraine and Gaza not going away, but more importantly, a lot of US economic
data on tap. The two most
important days this week will be Wednesday and Friday. On Wednesday morning, Economists will release
the updated GDP figures, including revisions. The economy detracted by 2.9% in the first quarter as a
result of a terrible winter across the country. Expectations are that Q2 GDP will come in at 3.2%, and
anything less may have a negative impact on the stock market. More importantly on Wednesday afternoon,
the Fed will release minutes from its latest FOMC meeting. There’s no question they will continue
to taper their bond purchases to stay on pace for ending in October. What will be of importance is what the
Fed hints at in regards to raising interest rates. A weaker than expected GDP number may help policy makers
decide to hold off rate increases until mid to late 2015. We also want the Fed to clarify what
metrics they are going to use to determine when to raise rates. Inflation pressures seemed to have
subsided with the inflation rate well below the Fed’s 2-2.5% target, which I
think is more important to when rates increase than the unemployment data. I expect the Fed minutes will show
dissent among certain Fed policy makers but that rates will stay near zero
until mid 2015.
Friday
will be another key day with July’s non-farm payrolls report. After last month’s huge upside surprise
of 288,000, economists are expecting a slightly lower number of 250,000. However, the more important figure to
watch is wage growth. Wages have
only increased about 2% in the last year, but after adjusting for inflation,
that’s only about a 0.5% increase.
Fed Chairman Janet Yellen has stated that she wants to see wage growth
normalize at around 3-4% annually, otherwise there will remain too much slack
in the labor market, so keep your eye on the hourly wages figure.
No
matter what happens to the broader market this week, I recommend you buy shares
of my favorite airliner, Delta Airlines.
I purchased shares of Delta a couple weeks ago and added to my position
on Thursday’s sell-off. On Wednesday,
Delta reported a great second quarter of earnings with EPS up 6% at
$1.04/share, compared to estimates of $1.03/share, and revenues increased 9% to
$10.60B. Passenger load factor,
which measures Delta’s efficiency in filling seats and generating revenues was
86.3%, up from 84.4% YoY, and higher than the industry average of less than
80%. But that’s not all. Delta, which has improved operating
margins in each of the last few years, improved 59% YoY to 14.9% and Delta
expects that to continue in Q3, forecasting margins between 15-17%.
While
Delta’s passenger load factor is better than competitors United Airlines and
American Airlines, the reason I like Delta so much, and more than any other
airline stock is because of what they did in 2012. A few years ago, Delta made a risky cost-cutting move by
purchasing a refinery in Trainer, PA from Phillips 66 for $150M. Airlines are fighting for margin growth
and this purchase will have a continuous positive impact on cutting
expenses. On Wednesday, Delta
solidified itself as having the highest margins in the industry with the lowest
capital costs per passenger, most of that coming from lower fuel costs. Delta reported fuel costs for the
quarter were $2.93/gallon, far superior than the industry average of
$3.08/gallon, due to fuel hedging but mainly because of it’s purchase of the
Trainer refinery. Not only is the
refinery lowering fuel costs, but it’s also profitable, producing 70,000 barrels/day
with profits in Q2 of $13M. Delta’s
management said the refinery is giving the airliner a big tailwind for the rest
of the year and going forward in 2015.
Delta now expects Q3 fuel costs to drop 17% QoQ to $2.88/gallon, where
the rest of the industry should remain above $3.05/gallon.
Based
on the technical set up, I like Delta at these levels. Looking at a daily chart, Friday’s
close of $38.06 is just above the 78.6% Fibonacci retracement, and if the
market were to sell off, Delta has bounced of a long-term uptrend line twice,
giving the stock support around $36.
I would recommend buying 50% of your position this week and the rest if
the stock sells off to $36. While
the stock is already up 39% YTD, I think Delta still has a lot of room to
run. Carrying out trendlines and
Fibonacci retracements, I am putting a $52 price target on Delta, representing
a 37% gain from Friday’s close.
The stock is still incredibly cheap, trading at a 40% (P/E 10x) discount
to the S&P 500 based on 2015 earnings estimates.
All
eyes will be focused on events in Ukraine and Gaza, but on the home front,
Wednesday and Friday will be big days of economic data. I still believe that all sell-offs
induced by issues abroad, are great buying opportunities, so begin buying Delta
Airlines this week and let the money roll in.
My current positions: Long
Ford (F), Gilead Sciences (GILD), SunPower Corporation (SPWR), Starbucks (SBUX),
Macy’s (M), Boeing (BA), Google (GOOGL), Facebook (FB), Coach (COH), Citibank
(C), Delta Airlines (DAL) Biogen Idec (BIIB), El Pollo Loco (LOCO), and short
IBM (IBM), short SUGAR, short GAS, and short CORN.
Jeff Lewison
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