Airline stocks have been under pressure of late, driven by massive jump in flight cancelations during the 4th of July holiday, which is typically one of the busiest travel times of the year. But should investors allow that issue to cloud the opportunity that currently exists in Delta Airlines (DAL)?
The company’s growth prospects and liquidity have drastically improved ahead of its second quarter fiscal 2022 earnings results, which is due before the opening bell Wednesday. Delta is set to generate up to $1.7 billion in operating income with margins of 13% to 14%. The airline recently said that it now expects strong results for the second quarter, with adjusted total revenue “fully restored to 2019” levels. “Total unit revenues are expected to be 7 to 8 points better than initially expected on capacity that is 1 to 2 points lower than planned,” the update stated.
Demand for leisure travel is also quickly on the rise. “Unit revenue improvement is being driven by broad-based demand and pricing strength across consumer, business and international travel, with improvement through the quarter,” the airline added. As such, Delta’s profit margin is poised to recover to pre-pandemic levels. Meanwhile, Delta stock which has fallen 24% year to date and 30% in twelve months, does not reflect the management’s optimism.
Currently trading at a forward P/E multiple of 6.6 times 2023 estimates which is significantly below its historical levels, it would appear that investors are discounting the operating improvements. By comparison, the S&P 500 index trades at a forward P/E of 16, which makes Delta stock one of the better bargains in transportation sector. That said, for the market to reassess its value, the company on Wednesday must deliver a top and bottom line beat, along with confidence guidance.
For the three months that ended June, analysts expect Atlanta-based transportation giant to lose $1.65 per share on revenue of $13.58 billion. This compares to the year-ago quarter when the loss came to $1.07 per share on $7.13 billion in revenue. For the full year, ending in December, earnings are projected to be $2.95 per share, compared to a year-ago loss of $4.08 per share, while full-year revenue of $47.79 billion would rise 59.8% year over year.
Since the onset of the pandemic, the main question for airline stocks was whether they can navigate the disruptions to emerge more profitable once the pandemic subsided. Russia's invasion of Ukraine, which threatened the stability of the global jet fuel market, didn’t help. Fuel costs often make up one-third of airlines' total expenses. In the case of Delta Airlines, while its operating cash flow has improved in recent quarters, the company posted loss last quarter mostly due to rising fuel costs.
Airlines must also face the prospect of higher interest rates, which means higher debt payments. The question is whether an increase in capacity and higher ticket prices can help offset these pressures for Delta which has beaten consensus earnings estimates in the last three reporting periods. In the first quarter, the airline posted an adjusted loss of $1.23 per share which beat estimates by 4 cents. Notably, while the company posted an adjusted loss for the quarter, it returned to profitability in the last thirty days of the quarter (March) as omicron faded.
Q1 revenue was also strong, rising 159% year over year to $9.35 billion, easily beating consensus estimates by $360 million. With the stock trading near yearly lows, particularly at a time when flight demand is recovering to pre-pandemic levels, Delta looks poised to regain some altitude.
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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