Why Delta’s Earnings Left Financial Pros in a Pickle

In June, we said Delta Air Lines (DAL) was a must-add to your portfolio.

Shares ripped almost 20% before a hefty pullback through November.

But then, the stock bounced almost 50%.

Now, it’s about halfway between that November bounce and its recent highs.

The company’s latest earnings results didn’t please traders.

Yet, when we dug into the details, we saw a company making all the right moves.

Financial pros slowly began looking at the company’s valuation, according to our TrackStar data.

And as we’ll explain below, there is a compelling case to be made.

Delta’s Business

Delta isn’t just any airline; it’s a titan in the skies. 

Boasting the world’s largest commercial fleet, it connected over 190 million passengers last year. 

Despite a challenging environment, Delta achieved a record-breaking quarter with soaring holiday travel volumes. 

But here’s the real kicker: while international demand and premium revenue climbed, the company managed to keep non-fuel costs surprisingly stable

Investors knocked down the stock on lower 2024 forecasts despite its excellent results. Allegedly, markets were looking for guidance over $7 per share.

Source: Delta 2023 Q4 Supplemental

Here’s the thing. Fuel assumptions drove the ‘conservative’ guidance.

Delta based its assumptions on an average fuel price of $2.70 per gallon. Yet, it’s targeting $2.50 for Q1, and current prices run around $2.47.

While oil is trading at the lower end of its price range, there’s a distinct possibility supply chains have normalized back towards 2019 operations, which could send the cost of crude down another 30%.

Financials

Source: Stock Analysis

Financially, Delta’s flying high with record revenues, but it’s not all clear skies. 

Higher fuel costs have dented gross margins, yet the airline’s operating efficiency shines through, matching pre-pandemic profitability. 

Here’s the standout fact: Delta’s generating a robust $7 billion in operating cash flow and  $304 million in free cash flow, skillfully navigating debt reduction while bolstering its cash reserves. 

Now, with a dividend back in play and a forecast of up to $4 billion in free cash flow for 2024, Delta’s financial trajectory is one to watch.

Valuation

Source: Seeking Alpha

Delta is middle of the road compared to the other major air carriers.

United Airlines (UAL) trades at 1.5x operating cash flow, while Southwest Airlines (LUV) trades at 5.1x operating cash flow.

Like Southwest, Alaska Airlines (ALK) trades at elevated multiples, including a forward P/E ratio of 17.4x compared to Delta’s 6.1x.

This creates two distinct groups of airline valuations.

Growth

Source: Seeking Alpha

Interestingly, Southwest and Alaska’s revenue growth isn’t significantly higher than Delta’s, looking backward. 

But looking forward, Delta sees far worse revenue growth than any of its peers. Even JetBlue (JBLU) is well ahead at 16.6% YoY forecasted growth.

So, are these other airlines more profitable than Delta?

Profitability

Source: Seeking Alpha

Not really.

Delta’s EBIT margins trounce all its peers, as do its net income and free cash flow margins.

That’s helped it deliver the group’s best returns on equity, assets, and total capital.

Our Opinion 9/10

Delta’s recent market dip might look daunting, but it’s a potential goldmine for savvy investors. 

Yes, its debt mountain is formidable, but don’t overlook the skilled management steering the course. 

With Delta’s strategic financial play and a conservative yet promising earnings outlook, this could be your ticket to a rewarding investment.

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