Airline stocks have been under pressure for most of 2022, with data showing that booking trends fell below pre-pandemic levels in some cases, while a surge in oil prices, which is often a prelude to a recession, pressured the profitability in airline stocks. However, Delta Air Lines (DAL) has found ways to land softly amid slowing air travel.
The stock has risen 22% over the past six months, including 10% this week alone. Investors want to know if there’s still an opportunity there, given that the company is set to generate up to $1.7 billion in operating income with margins of 13% to 14%. The company’s growth prospects and liquidity have drastically improved ahead of its fourth quarter fiscal 2022 earnings results which is due before the opening bell Friday.
Ahead of the quarter, the company is expected to benefit from revenue increases from international travel, where it has reported a gradual recovery, especially in Latin America and Transatlantic routes. Last week Argus analyst John Staszak upgraded Delta to a Buy rating from Hold, setting a new price target of $39. From currently levels, the target implies a potential return of 15%. "We think that the current multiple inadequately reflects prospects for steady growth in business travel and a recovery in international flight," noted Staszak.
The airline is expected to report 2022 EPS of $3.10 and 2023 EPS of $5.50. Staszak also expects low double-digit operating margins for 2024. Travel demand from the holiday season is expected to benefit the company’s total unit revenues as prices rise across consumer, business and international travel. As such, with the stock currently trading at a P/E multiple of less than 10 times 2023 estimates which is significantly below its historical levels, Delta remains one of the better bargains in transportation stocks.
For the three months that ended December, analysts expect Atlanta-based transportation giant to earn $1.34 per share on revenue of $12.39 billion. This compares to the year-ago quarter when earnings came to 22 cents per share on $9.47 billion in revenue. For the full year earnings are projected to be $3.06 per share, compared to a year-ago loss of $4.08 per share, while full-year revenue of $45.58 billion would rise 52.5% year over year.
With full-year revenue projected to rise north of 50%, comparatively Delta is still operating with the benefit of easier year-over-year metrics. For the just-ended quarter, revenues are expected to rise 7% to 8%, putting it at the high end of the company's previous guidance. This is encouraging, suggesting demand for air travel remains healthy despite concerns about softening travel trends as well as recessionary concerns. Also encouraging is that the company’s operating costs are trending lower.
The company is seeing cost benefits at a time when it is has begun to scale up the business. That rate of increase will be supported by Delta’s efforts to boost profit margin which could lead to several earnings beats in the new fiscal year. In the third quarter, the airline posted an adjusted EPS of $1.51 per share which missed estimates by 2 cents. Q3 revenue came in at $13.98 billion, rising 52.6% year over year, beating estimates by $357.5 million.
Airline demand was a strong driver for revenue beat, which is expected to remain strong through the fourth quarter holiday season. With the stock trading 30% below its average price target of $50, Delta stock looks poised to regain some altitude as the shares still trade near yearly lows. And if judging by management’s guidance increase, and rising operating cash flow, along with operating margins, now would be an ideal time to buy.
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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