Airline stocks have been one of the strongest sectors so far in 2023, outperforming the broader S&P 500 index. Although Delta Air Lines (DAL) have been one of the beneficiaries of a robust global travel demand, Delta stock has lost some of its momentum over the past month, shedding more than 11%.
What’s more, since the company’s last earnings report, its shares have shed almost 24% of their value. But there’s still tons of value here, given Delta’s strong footing in both the domestic and international air travel markets. Whether buying the stock now or waiting until later is one of the many decisions investors are assessing ahead of the company’s third quarter fiscal 2023 earnings results which are due before the opening bell Thursday.
Earlier this week Bank of America analyst Andrew Didora reiterated his Buy rating on the stock with the $40 price target. Saying he does not expect any significant surprises in the upcoming earnings results, Didora called Delta a well-run airline with industry leading operations. As a strong differentiator to competing airlines, the analysts noted Delta’s strong free cash flow potential the next few years.
Ahead of the Q3 earnings report, some of the key points investors should focus on include management’s commentary around softness in booking pricing, and any changes to capacity growth amid rising fuel costs. However, Delta is still expected to benefit from revenue increases from both domestic and international travel, where it has reported a gradual recovery, especially in Latin America and Transatlantic routes. As such, Delta remains one of the better bargains in transportation stocks.
For the three months that ended September, analysts expect Atlanta-based transportation giant to earn $1.94 per share on revenue of $14.54 billion. This compares to the year-ago quarter when earnings came to $1.51 per share on $12.87 billion in revenue. For the full year, ending in December, earnings are projected to be $6.10 per share, rising from $3.20 a year ago, while full-year revenue of $54.65 billion would rise 19.8% year over year.
With full-year revenue projected to rise close to 20%, comparatively Delta is still operating with the benefit of easier year-over-year metrics. Notably, for the quarter, revenue is expected to grow by about 13% year over year, driven by an uptick in domestic air-travel demand and what remains strong booking trends. In terms of profits, assuming Delta earns the $1.94 per share estimate, this would mark its sixth consecutive quarterly profit in almost two years.
Analysts are expecting the company to generate a positive earnings surprise of more than 10% on average EPS rate through 2023. That said, Delta’s fuel expenses remain a headwind. Delta forecasts average Q3 fuel cost per gallon to be in the range of $2.75 to $2.90, which is higher than prior forecast of $2.50 to $2.70. Analysts are expecting full costs to come in at $2.88 per gallon.
High fuel cost is likely to creep into the bottom line in the third quarter. Due to these higher costs, management recently lowered its Q3 projections for adjusted operating margin and adjusted earnings per share. But as noted, higher costs did not prevent Delta from delivering a beat on Q2, posting an adjusted EPS of $2.84 which beat estimates by 44 cents.
Q2 revenue came in at $15.58 billion, rising 12.69% year over year, beat estimates by $283 million. During the quarter, domestic segment revenue was up 8% to $8.94 billion, while the Atlantic segment revenue rose 22% to $2.8 billion. Total unit revenue per available seat mile rose 1% on 17% higher capacity. Given these positive booking trends, combined with rising free cash and expense reductions, Delta remains one of the better bargains in transportation stocks.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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