DAL - Delta Air Lines: Emerging A Bullish Setup

2023-12-12 21:31:21 ET

Summary

• Delta Air Lines is projecting solid financial growth and recovery in 2023.
• The company's financial performance in Q3 2023 demonstrated a strong recovery and increased demand for air travel.
• Delta Air Lines' stock price shows potential for a robust rally, supported by its solid performance and outlook.

Delta Air Lines, Inc. ( DAL ) is heading towards the final quarter of 2023 with financial projections and recent performance indicators depicting robust growth and strong recovery. The outlook for Q4 2023 and the whole year is highly optimistic, with significant increases in revenue, healthy operating margins, and promising Earnings Per Share ((EPS)). This article extends the discussion initiated in the previous piece , focusing on Delta Air Lines' financial well-being and offering a technical analysis to identify potential investment prospects. There's a noticeable strength in the stock price, suggesting a potential for a robust rally.

Financial Outlook for Delta Air Lines

Delta Air Lines is scheduled to release Q4 2023 earnings on January 12, 2024, showcasing a promising outlook for 2023. The forecast for Q4 2023 indicates an expected increase in total revenue year-over-year by 9% to 12%, which suggests a solid end to the year. The operating margin is projected to be healthy, ranging between 9% and 11%, indicating efficient management and potentially strong profitability. EPS is forecasted to be between $1.05 and $1.30, which could be a positive outcome for shareholders. For the full fiscal year 2023, the outlook is even more robust, with total revenue anticipated to surge by approximately 20%. The operating margin is expected to be around 11.5%, and EPS is forecasted to be substantially higher at $6.00 to $6.25, reflecting a successful year. This forecast suggests confidence in the company's performance and profitability for 2023.

This robust financial forecast stems from the solid performance witnessed in recent quarters. In Q3 2023, Delta Air Lines demonstrated a robust financial performance, signaling a strong recovery in the airline sector and an increasing demand for air travel. According to GAAP metrics, the company reported operating revenue of $15.49 billion with an adjusted revenue of $14.6 billion, a 13% increase from Q3 2022. The chart below illustrates a robust growth in quarterly revenue following the low point in 2020. This growth reflects the success of Delta Air Lines's diverse revenue strategies and brand strength.

Moreover, Delta Air Lines achieved an operating income of $2.0 billion with an operating margin of 12.8%, and an adjusted operating margin of 13.5%. Pre-tax income was also impressive, with GAAP figures at $1.5 billion and adjusted figures at $1.7 billion. Earnings per share were strong, with GAAP EPS at $1.72 and adjusted EPS at $2.03, indicating healthy profitability. Delta Air Lines maintained a solid cash flow of $1.1 billion.

Delta Air Lines's sector-specific performance showed significant gains, especially in domestic and international travel sectors. Domestic passenger revenue grew by 6%, while international passenger revenue soared by 35%, with exceptional growth in Transatlantic and Latin American markets.

Regarding expenses, Delta achieved a slight 1.3% increase in non-fuel CASM and a 10% decrease in adjusted fuel expenses. This effective cost management and a tactical debt-handling strategy have resulted in an enhanced balance sheet. The company's significant debt repayment has been acknowledged with a credit rating improvement by S&P.

Overall, Delta Air Lines' upcoming Q4 2023 earnings are poised to conclude a year of notable financial growth and heightened operational efficiency. The combination of increased demand, strategic revenue diversification, and effective cost management has positioned Delta Air Lines for a successful close to 2023, with optimistic projections for revenue, operating margin, and EPS. This positive trend, underlined by robust quarterly performances and improved financial health, signals a strong future for Delta Air Lines in the competitive airline industry.

Exploring the Dynamics of Price Consolidation

Recap

The previous article discussed Delta Air Lines' robust bullish trend, highlighting the double bottom pattern in 2008 and 2009, which led to a significant rally. The stock's performance was further evidenced by successive candle wicks bottoming in 2012, followed by a continuous surge to record highs. The development of a falling wedge pattern further enhanced the bullish outlook. Initially, this bullish pattern was projected to break at $41, aiming for a target of $52.28. However, due to substantial market volatility, broader market fluctuations were expected.

The Next Move

As per expectations, the market surpassed the $41 mark, peaking at $49.57. However, intense volatility led to a subsequent decline in the stock price. The downturn observed in August, September, and October of 2023, starting from $49.57, led to the emergence of a symmetrical triangle pattern as shown in the monthly chart below.

This triangle pattern underscores the potential for an upward breakout, a likelihood supported by the strong rally, the stock experienced from 2012 to 2019. This significant rally was due to a combination of factors. Primarily, the airline industry benefited from a period of sustained economic growth, which increased business and leisure travel demand. Additionally, Delta Air Lines implemented successful cost-cutting strategies and efficient operational improvements, enhancing its profitability. The company also capitalized on industry consolidation, reducing competition and allowing for better pricing control. Moreover, Delta Air Lines strategically invested in its fleet and technology, improving customer experience and operational efficiency. As the stock price oscillates within the confines of a symmetrical triangle, it needs to surpass the $52.28 threshold to trigger a significant rally.

This bullish momentum is further evidenced in the weekly chart below, showcasing robust weekly candles over the past weeks and indicating the potential for a continued upward surge toward $52.28. The red arcs in the chart emphasize that each market downturn has swiftly rebounded from the bottom, fueling a strong upward movement.

Given the strong upward momentum in the stock's price, investors may consider buying at present value, anticipating a surge beyond $52.28.

Market Risks

As fuel costs are a significant expense for airlines, fluctuations in oil prices can significantly affect profitability. When fuel prices rise unexpectedly, Delta Air Lines's operating costs could increase, potentially eroding margins and affecting earnings. Additionally, the airline industry is highly sensitive to economic cycles. Any downturn in the global economy, which could lead to reduced consumer spending and corporate travel budgets, may negatively impact demand for air travel, thereby affecting Delta's revenue growth.

Another risk factor is the intense competition within the airline industry. Despite Delta Air Lines's strong brand and market position, the presence of low-cost carriers and ongoing industry consolidation could pressure fares and yields. This competition not only comes from domestic carriers but also from international airlines expanding their routes and services. Furthermore, Delta Air Lines must continuously invest in customer service, fleet upgrades, and technology to stay competitive, which requires significant capital expenditure. From a technical standpoint, the stock is forming a symmetrical triangle, and a fall below $20 would counter the current bullish trend, potentially leading to a significant market decline.

Conclusion

In conclusion, Delta Air Lines is approaching the last quarter of 2023 with a highly optimistic outlook, reflecting strong recovery and robust growth. The financial projections for Q4 2023 and the entire year indicate a significant increase in revenue, healthy operating margins, and promising EPS. This positive trend is supported by Delta Air Lines' solid performance in recent quarters, including a 13% increase in adjusted revenue in Q3 2023, and an operating margin of over 12%. The company has also made strides in cost management and strategic debt handling, leading to a better credit rating.

The technical analysis indicates robust price consolidation, aligning with a bullish perspective. A price break above $52.28 will signal an upward breakout from the symmetrical triangle, potentially leading to a substantial rally. Conversely, a drop below $20 would reverse the bullish trend, opening the possibility of further decreases. Investors may consider buying Delta Air Lines at the current price, focusing on potential long-term gains.

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