DAL with Nobias technology: Should Investors Consider Buying Delta after it's Third Quarter Dip?
Coming out of the COVID-19 recession, we’ve seen much of the economy reopen. However, the digital work-from-home trend which pushed employees out of the office appears to have remained largely in place. This really hurts certain industries (commercial real estate, lodging, and the airlines, in particular). Roughly 20 months after the onset of the COVID-19 pandemic, a debate still rages as to whether or not, with the benefit of hindsight, 2019 will prove to represent peak business travel? If this is the case, it will be difficult for the major U.S. airline stocks to recover because these companies have taken on a lot of debt and in many cases, sold large amounts of equity, which is putting pressure on their underlying fundamentals.
For months, the airlines have been counting on business travel to pick back up to pre-pandemic levels; however, this hasn’t happened yet. The airlines are attempting to make up for lost business volumes with heightened leisure travel as more and more travel restrictions are taken off the books and consumers who’ve been cooped up in their homes finally have the ability to go on vacations again. However, it’s unclear as to whether or not leisure demand is going to be able to make up for the enterprise shortfall and with that in mind, there is still a lot of push and pull going on between the bulls and the bears when it comes to the airline stocks.
Delta Airlines (DAL) just posted its third quarter earnings results. Because of this, we wanted to take a look at what the credible analysts that the Nobias algorithm tracks have had to say about this battleground stock. Coming into the quarter, Mircea Vasiu, a Nobias 4-star rated analyst, laid out Wall Street’s expectations for Delta’s Q3 results in an article at vantagepointtrading.com.
Vasiu touched upon DAL’s struggles during the recent past saying, “The stock price declined severely during the pandemic as travelling literally came to a halt. On top of that, the news that Warren Buffett, the famous investor, sold all its participation in the company pushed the stock price lower even more.”
“However,” Vasiu continued, “Delta Air Lines stock price recovered smoothly. It is now up by 32.74% in the last 12 months, in a bullish trend since the 2020 dive. Ahead of the quarterly earnings, investors are optimistic that the company may deliver better than expected results, just like it did in the previous quarter, when it delivered a revenue surprise, beating expectations by $858 million.” Coming into Q3, the analyst noted that Wall Street’s consensus was for DAL to generate $0.17/share in earnings, which would represent “the first positive quarter since the COVID19 pandemic started.”
Apparently these expectations for positive earnings have Wall Street analysts excited because Vasiu wrote, “Just like investors, analysts are optimistic about Delta stock price. Out of the 30 analysts covering Delta Air Lines stock price, 23 have issued buy ratings, while 7 have neutral ratings. More interestingly, no analyst has a sell rating for the Delta Air Lines stock.” With that in mind, let’s take a look at Delta’s actual results, which were posted on Wednesday, October 13th, 2021.
Delta Airlines beat analyst estimates on both the top and bottom lines; any yet, even after the surprisingly good results, DAL shares sold off. Delta Airlines closed the week down 5.51% and now trade with a 20.6% discount to their 52-week highs. Ben Mahaney, a Nobias 4-star rated analyst, covered the results in a recent Yahoo Finance article. He began by saying, “Adjusted earnings of $0.30 per share significantly beat analyst estimates of $0.17 per share.” This $0.30/share figure was well above the -$8.47/share that Delta produced during Q3 last year.
However, Mahaney said, “The company warned that the current rise in fuel prices will hamper its ability to profit in the fourth quarter.” This appears to be a major catalyst for the stock’s negative momentum after the Q3 beat. When it comes to DAL’s top-line, Mahaney wrote, “Revenue stood at $9.15 billion and outpaced the Street’s estimate of $8.39 billion. In the same quarter last year, the company posted revenue of $2.6 billion.”
Mahaney went on to quote Delta’s CEO, Ed Bastian, who after the results said, “While demand continues to improve, the recent rise in fuel prices will pressure our ability to remain profitable for the December quarter. As the recovery progresses, I am confident in our path to sustained profitability as we continue to provide best-in-class service to our customers, strengthen preference for our brand, while creating a simpler, more efficient airline.”
Mahaney highlighted Delta’s near-term expectations and compared them to pre-pandemic levels saying, “Based on current flying demand and the upcoming holiday season, Delta expects its Q4 revenue to recover to a low 70% compared to Q4FY19, with 80% capacity. Additionally, the company announced the acquisition of two used A350 aircraft, which will start deliveries in the December quarter.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
However, looking a bit further out into the future, we see that Colin Scarola, a Nobias 4-star rated analyst, who is Vice President of Equity Research at CFRA Equity and Fund Research, is much more bullish on volume trends. Scarola published an article at moneyshow.com after the Q3 results which highlighted CFRA’s bullish outlook for DAL shares. He wrote, “CFRA raises its STARS rating on shares of Delta Airlines (DAL) to Strong Buy from Buy, while we keep our target price at $55 per share — 12x our 2022 EPS estimate (raised to $4.49 from $4.31; 2021 cut to -$3.82 from -$2.57).” He continued, “DAL is now on course to generate positive free cash flow for the remainder of the pandemic, with pandemic balance sheet deterioration now complete, in our view, eliminating a key risk for the stock going forward.”
Scarola said, “Shares have sold off about 20% since April even as the 2022 earnings outlook has greatly improved, in our view, leading to our upgrade to Strong Buy.” He further said that CFRA believes that “the U.S. and other developed economies to be through low-hospitalization Delta variant waves by the end of Q3, setting the stage for a major resurgence of international and business travel in Q4.”
Overall, the community of credible authors that Nobias tracks shares this bullish outlook. Right now, 81% of credible analysts express a “Bullish” opinion on DAL shares. The average price target being applied to DAL by the 4 and 5-star Wall Street analysts that we track at Nobias is currently $53.60. Today, DAL shares trade for $40.99, which means that the consensus price target represents upside potential of approximately 30.7%.
Disclosure: Nicholas Ward has no positions in any stock mentioned in this article. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.