Delta Air Lines May Take Time to Reach Higher Altitude

Delta Air Lines (NYSE: DAL) stock is up 10% in the past 30 days. Is that a sign that DAL stock is ready to go higher after the company posts earnings on October 13? The message for Delta Air Lines passengers and investors is the same. Be patient. The stock is likely to recapture its pre-pandemic high, but it may take 12 months or more to do so.  

The earnings report is likely to be favorable. The consensus opinion of analysts is for the airline to post earnings per share (EPS) of 17 cents. That will mark the first time since the pandemic that the company has posted positive EPS. Revenue is forecasted to come in at $8.43 billion which is in-line with the $8.59 billion Delta posted in the first quarter of 2020. 

If Delta hits those numbers (and frankly even if they disappoint slightly) it will still be an easy and sizable beat on a year-over-year basis. Revenue will be nearly 65% higher and the EPS gain will be nearly the same. However, airlines have been jumping over low bars for several quarters. The question is what comes next.  

That’s where the picture gets a little cloudy. Delta is still reporting strong domestic travel numbers. Still, those numbers are 18% to 20% below 2019 levels. This is why the company is still calling for a 30% to 35% drop in adjusted revenue compared to the same period in 2019. However, Delta forecasts that its domestic travel bookings will surpass 2019 levels in 2022. For that to occur, the airline will need to see an increase in international travel which made up a significant portion of total 2019 revenue.  

What Could Go Wrong? 

One potential obstacle to Delta Air Lines hitting its forecasted numbers is business travel. The airline is counting on the return of business travel in the fourth quarter. But with many companies announcing that they wouldn’t be resuming business travel until the beginning of 2022 at the earliest, that may turn out to be too optimistic of a projection.  

Another factor has to be energy costs. While Delta is the first carbon-neutral airline and has pledged to replace 10% of its fuel with sustainable aviation fuel (SAF) by 2030, there’s little doubt that the company will be affected by rising fuel prices in the near term.  

The Virus is Still a Story  

If you went long on DAL stock at the onset of the pandemic, you’re enjoying a gain of over 100 percent. And DAL stock is still 24% below its pre-pandemic level. That’s only about five percent higher than the consensus estimate of analysts tracked by MarketBeat. They give Delta Air Lines a price target of $53.41. So you have reason to believe that there’s more growth to come.  

But how soon will that growth arrive? if you’ve been riding DAL stock in that time frame, you know there’s been some turbulence involved. In early April, DAL stock closed above $50 a share. But in mid-August, shares were trading below $38 a share. Much of that was due to the Delta variant of the novel coronavirus. 

However, since case counts are dropping, air travel is increasing and with it shares of Delta stock. If case counts begin to rise due to the emergence of another variant, the pattern shows that DAL stock will drop.  

How Do Analysts Feel? 

The consensus opinion of analysts tracked by MarketBeat gives Delta a Buy rating by a nose. Out of 18 analysts nine give the stock a buy rating and one rates it a strong buy. However, eight analysts rate DAL stock as a hold. And on October 6, one analyst, downgraded Delta from Overperform to Peer Perform.  

Like most stocks that are associated with travel, I think a long position is warranted. However, if the s company misses on estimates, there could be a short-term selloff. Even if the company beats expectations, it may take time for that investment to pay off particularly since Delta has suspended its dividend.