Delta Air Lines, Inc. (NYSE: DAL)
Delta Air Lines is one of the biggest airlines in the United States with its headquarters situated in Atlanta, Georgia. Delta was founded in 1925 by Collett E. Woolman making it one of the oldest airlines in the world. In light of having scored a massive new deal from Boeing, Delta Air Lines has seen an increase in mentions by 76% over the last day, prompting investors to wonder what makes the company gain so much hype. Currently, Delta Air Lines stock is trading at $31.30 per share.
Positive Hype
Despite the poor performance of the airline industry through the COVID-19 years, things are picking up pace and Delta seems like the frontrunner. Here are some of the reasons you should consider taking a position in the company now.
One of the major reasons Delta caught everyone’s attention was because Boeing announced a massive $13 billion order from the airline company, signalling their positive outlook for the future.
In addition to boasting state-of-the-art engine technology, Delta's 737 MAX 10s (the order from Boeing) will have about 15% more seats than the flights exiting the fleet. The new planes will be 20% to 30% more fuel efficient than the ones they replace, thus helping Delta keep its costs down.
On the company's recent second-quarter earnings call, CEO Ed Bastian said that Delta was interested in expanding its order book for large narrow-body jets in the 2025 to 2027 timeframe which is all good news.
Delta Air Lines also recently released their quarterly report where it reported adjusted revenue of $12.3 billion for the second quarter which beat its initial forecast.
The company generated $1.6 billion of free cash flow last quarter, beating its most recent guidance by about $100 million. For airlines, free cash flow is a better indicator of long-term performance, particularly because of the lag between when carriers sell tickets and when they recognize revenue.
In addition, management expects to generate over $4 billion of annual free cash flow by then.
Delta's total unit revenue exceeded 2019 levels by 20% last quarter as air travel demand far outpaced seat supply. Their management expects unit revenue growth to accelerate further in the third quarter.
The full-service airline's forecast calls for Q3 revenue to increase by 1% to 5% compared to Q3 2019, even though it will be operating with 15% to 17% less capacity.
Apart from flight services, Delta Air Lines reported that total remuneration from its credit card partnership with American Express surged by 35% compared to Q2 2019 last quarter to a record $1.4 billion. Spending on Delta co-branded AmEx cards was up a stunning 43% over that period.
Negative Hype
Despite there being an ample number of reasons that would make it a good idea to take a position in Delta Air Lines right now, it is also important to consider the downsides of this opportunity. Here are some of them.
Delta cited higher costs and acknowledged stumbling as it tried to cope with strong demand by passengers. The airline’s profit fell short of expectations. Separately, Fastenal said there were signs of softening demand, helping send its shares down 6.4% for the day.
Delta’s adjusted earnings per share came in at $1.44, roughly 16% below the average analyst estimate. However, despite missing its margin targets, Delta Air Lines reaffirmed that it's on track to grow adjusted earnings per share to more than $7 by 2024.
Conclusion
Considering Delta's unit revenue momentum, strong cash flow, rapidly growing credit card revenue stream, and the cost-benefit of returning to pre-pandemic capacity levels, Delta seems like it’s doing well for itself now and will continue to if its growth is not hindered by a possible upcoming recession. Regardless, Delta Air Lines stock is trading at around 4 times management's 2024 earnings target which makes it look like quite the steal now given the high margin of safety.
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