Delta Takes Flight: Double-Digit Upside In Sight

Key Points

• Delta Air Lines beat its guidance and raised guidance for the year. 
• The company accelerated its debt reduction and is on track to pay down $4 billion this year. 
• Analysts support the stock and may drive it to new highs by the end of the year. 

Delta Air Lines NYSE: DAL surprised the market when it released preliminary results for Q2. The news included a robust outlook for revenue and earnings driven by solid demand for travel. Travel demand is underpinned by consumer and business needs and resulted in outperformance. That’s right. The Q2 results were released only 2 weeks after the guidance was issued and included what the market hoped it would; outperformance and an increase in guidance. 

The takeaway is that Delta performs at record levels, with shares well below the pre-pandemic levels. This suggests the stock is grossly undervalued and may soar higher over the next few months. At face value, the stock has about 25% of upside before it reaches the previous highs; if the company continues to perform as it is, new highs may be reached by the end of the year. 

Delta Blows Past Guidance And Consensus; Raises The Outlook 

Delta had a solid quarter with revenue of $15.58, growing 12.75% compared to last year. On a core, operating basis, the company’s revenue grew by 19% and set a quarterly record. Revenue was driven by demand in all segments and was underpinned by an increase in capacity and revenue per unit. The excellent news is that costs return to better alignment and drive a robust bottom-line performance.

The EBIT margin grew by nearly 100% YOY leaving the adjusted operating margin at 17.6%. This drove record quarterly earnings of $2.68, beating the consensus by $0.29 or about 1200 basis points. 

The guidance is even better. The company expects revenue strength to continue and margins to improve in the back half of the year. That led to an increase in 3rd quarter and FY outlook, with FY earnings lifted by a dollar at both ends of the range.

The company expects $6 to $7 in adjusted EPS compared to the $6.20 consensus figure, and there is a good chance that guidance will be increased again later this year. Looking to next year, the company predicts EPS above $7 compared to the $7.10 consensus figure; this guidance may also be increased later this year. 

Delta’s unanticipated cash flow was put to good use. The company CFO says cash flow allowed for accelerated debt repayment, which means $2.5 billion has been retired YTD. The outlook for FY debt reduction was increased to $4 billion, and it may top that figure if strength continues to build in Q3 and Q4.

Regardless, this is excellent news for investors because it cleans up the balance sheet and paves the way for a dividend increase. The dividend partially supports Delta shares, which were reinstated in Q2. The payment was set at $0.10 quarterly or $0.40 annualized, about 25% of the pre-pandemic payout, so shareholders have significant upside potential. 

Analysts Are In The Pilot Seat At Delta 

The analysts support Delta stock and have been driving the upswing in price action. The trends ahead of the Q2 release and guidance update were positive, with sentiment up to Buy from Hold and the price target trending higher than last month and last year. Assuming the analysts are pleased with the guidance, this trend should continue. Until then, the consensus price target is about 12% above the price action, and the high price target is another 27% above that. 

The chart is favorable to higher prices. The market is in a sharp uptrend driven by news and results and now breaking out of consolidation. The consolidation was short and sweet and appears to have substantial momentum. If the market follows through on this signal share price could increase to the $60 range.