2023-07-13 09:54:28 ET
Summary
- Delta Air Lines has reported Q2 earnings, beating expectations with EPS exceeding by 29 cents and revenue by $120 million, and has raised its Q3 guidance significantly.
- Despite a 13% increase in revenue, Delta's operating expenses only rose by 6% due to reduced fuel costs. The company reinstated its quarterly dividend, showing strong financial discipline.
- However, the company faces potential challenges with increasing employee costs and the cyclical nature of the airline industry, which could impact future profitability.
Earnings season is here once again. As I've written before, this is both an exciting and a bit of a stressful time for me as an author and an investor as news come in thick and fast. In short, too many stocks to follow and not enough time to analyze them all and write about them all. Luckily, Seeking Alpha's Portfolio page allows me to not only track my current holdings but also maintain a "Watchlist" portfolio of stocks that I've been interested in at some point. One of the stocks I follow but don't own yet, Delta Air Lines, Inc. ( DAL ) has just reported its Q2 earnings as Seeking Alpha has reported here and boy, didn't the report impress.
I review the Good, Bad, and Ugly from Delta's Q2 report in this article and what they may mean for the stock's outlook. A little disclaimer before we start. Given how good the report looks, the bad and ugly section may seem like grasping at straws. But, better safe than sorry when it comes to your money. Let us get into the details.
Good
- Beat, Raise, and Rise: Delta Air Lines has done the classic "Beat and Rise" that is sought after during earnings season.
- Q2's EPS beat by 29 cents and revenue beat by $120 million. In other words, by 12% and 8% respectively.
- If that is not impressive enough despite increased EPS expectations, Delta hit it outside the park on Q3 guidance as the lower end of its new guidance is 7% higher than the previous consensus. Okay, to make that simpler, the company has guided for an EPS range of $2.20/share to $2.50/share when the consensus was $2.05. The company expects record revenue in the current quarter ending in September.
- It gets better, as FY 2023's EPS guidance range of $6 to $7 compares favorably with the estimated $6/share. It should be of no surprise that the stock is up more than 4% premarket and is about to breach $50 for the first time since before COVID.
- Operating Discipline: In a quarter where revenue increased by 13%, Delta's management showed appreciable discipline as operating expenses went by just 6%. A large factor is the reduced fuel expense, which went down from $3.82/gallon to $2.52/gallon on a YoY basis. However, it could have been easy for management to splurge when things looked (and still do) rosy but the fact that cost did not increase with revenue has immediately impacted the bottom-line as shown in the EPS beat and guidance.
- Travel Boom: It appears like the Travel boom is still going strong and should continue in the short to medium term at least. Reduced fuel price has provided carriers the dream scenario of lowering cost profitably, as much as that sounds like a badly framed sentence. " Bleisure " travel is likely playing a role in increased demand as employees can work from almost anywhere in the World these days and Delta has taken on-board connectivity seriously for quite some time now, thereby promoting a serious business friendly carrier image.
- Stock Is Still Attractively Priced: Despite the stock being up more than 50% YTD as of pre-market, the revised FY 2023 guidance gives Delta Air Lines stock a forward multiple between 7 and 8, making the stock cheaper now than it was heading into the earnings report.
- Dividend Coverage: Delta Air Lines recently reinstated its quarterly dividend, which was suspended at the height of the pandemic. The new dividend of 10 cents/qtr is one-fourth the level it was before the suspension. However, the fact that the company reinstated it recently and has followed up with impressive earnings and guidance shows conviction. I am fairly optimistic given the guidance that investors can soon expect the dividend to increase. As an example, the current quarterly dividend of 10 cents represents a payout ratio of 6% on an annual basis (40 cents) using the lower end of FY 2023's EPS guidance ($6).
Bad and Ugly
- Keep an eye on cost: Make no mistake about it, employees deserve a fair share of a company's profit. In specific, Delta Air Lines has a good reputation on how it treats and pays employees. However, as an investor, you should be looking at a company's cost (human cost or otherwise) critically. The fact that pilots will get a 34% increase by 2026 is significant. And this news was preceded by an almost-global 5% increase . At good times like present, these increases appear just. However, when a double whammy or triple whammy hits, like increasing fuel prices leading to lower demand, the increased personnel cost will start feeling like a burden rather quickly. There is something called "being too nice" in business world and I can make a case for Delta Air Lines being too nice.
- Technical: Pre-earnings, Delta Air Lines' stock was up more than 15% in a month and the stock's showed technical strength as its Relative Strength Index ("RSI") breezed into mid 70s (technically overbought) as shown below. Given the strong earnings report, it will not be a surprise to see further accumulation and for the stock to go into the extremely over bought territory. In short, be wary of "buy the rumor and sell the news" effect.
For further details see:
Delta Air Lines Earnings: Flying Higher