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Delta (DAL) Falls 11% in a Month: Thinking of Buying the Dip?
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Shares of Atlanta, GA-based airline heavyweight Delta Air Lines (DAL - Free Report) have not had a good time on the bourses of late, declining 11.2% over the past 30 days. Even though DAL has outperformed its industry in a month, the company has underperformed the S&P 500, of which the airline is a key member. Additionally, while DAL’s price performance compares favorably with that of United Airlines (UAL - Free Report) , it is poor compared with American Airlines (AAL - Free Report) in the same timeframe.
One-Month Price Comparison
Image Source: Zacks Investment Research
DAL is currently trading at a 29.2% discount to its 52-week high of $53.86 reached on May 13, 2024.
Given the significant pullback in Delta’s shares, investors might be tempted to snap up the stock. But is this the right time to buy DAL? Let’s find out.
Delta – The Hardest-Hit U.S. Airline Due to the Microsoft Outage
The global IT outage on Jul 19 impacted Delta greatly, resulting in multiple flight cancellations. Other U.S. airlines like American Airlines and United Airlines recovered much more quickly from the setback. Delta was the hardest hit and recovered only recently. DAL’s prolonged crisis was due to its dependence on Microsoft (MSFT - Free Report) systems for flight crew scheduling. As a result of one of DAL’s crew tracking-related tools being affected, the rescheduling of the airline’s multiple canceled flights became difficult, given the uncertainty surrounding the arrangement of a full crew.
Per CEO Ed Bastian, the outage cost DAL approximately $500 million over the course of five days. DAL not only had to refund tickets for the canceled flights but also had to spend significantly on hotel accommodations and other compensation for its customers impacted by the outage. According to the CEO, the severity of the impact left DAL with “no choice" but to seek outage-related damages.
The Jul 19 outage, which had crippled DAL’s operations, was caused by a CrowdStrike (CRWD - Free Report) software update. CrowdStrike is a security software provider.
Q2 Earnings Miss & Dismal Q3 View
On Jul 11, Delta initiated the second-quarter 2024 earnings season for the airline space. Quarterly earnings of $2.36 per share fell short of the Zacks Consensus Estimate of $2.37.
Earnings decreased 11.9% on a year-over-year basis. Apart from high costs, the carrier blamed the discounting pressure at the low end of the market, which hurt its pricing power, for the disappointing bottom-line performance. The airline also gave a bearish earnings per share view for the September quarter, with management expecting adjusted earnings per share between $1.70 and $2.00.
The practice of price cuts by low-cost carriers, as they struggle to fill the excess seats this summer, is hurting even bigger rivals. Discount carriers have added too many seats that they are now attempting to fill by lowering fares and compelling airline majors to do the same to stay competitive.
Other Notable Headwinds
The increase in oil price is not a welcome development for the company as fuel expenses represent a key input cost for any airline player. The production cut announced by major oil-producing nations and geopolitical tensions directly impact Delta. As of now, third-quarter 2024 oil prices are expected to be in the $2.60-$2.80 band, which will affect the company’s profitability.
The northward movement in labor expenses is also hurting DAL’s bottom line by pushing up operating costs. The March 2023 agreement with pilots meant continued increases in non-fuel unit costs (likely to increase in the 1-2% band year on year in the September quarter).
Given the headwinds surrounding the stock, earnings estimates are southbound, as shown below.
Image Source: Zacks Investment Research
Silver Linings
Among the positives, upbeat passenger volumes bode well for DAL. While air travel demand is particularly strong on the leisure front, business travel has also made an encouraging comeback. Driven by upbeat air travel demand, DAL’s top line increased 6.9% year over year in the second quarter of 2024. This was driven by a 5% rise in passenger revenues.
In June, DAL hiked its quarterly dividend by 50% to 15 cents per share, highlighting its financial bliss. Financial prosperity owing to strong passenger revenues may have led to the dividend hike. The airline ended the second quarter of 2024 with cash and cash equivalents of $4.23 billion, much higher than the current debt level of $2.95 billion. This implies that the company has sufficient cash to meet its current debt obligations.
From a valuation perspective, DAL is trading at a discount compared to the industry, going by trailing 12-month EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization), a commonly used multiple for valuing airline stocks. The reading is also below its median over the last five years. The company has a Value Score of A.
Image Source: Zacks Investment Research
To Sum Up
Agreed that the stock is attractively valued and upbeat passenger revenues are serving DAL well. However, given the abovementioned headwinds, we believe that it is not at all advisable to buy the dip in this Zacks Rank #4 (Sell) stock until the company demonstrates substantial improvement in its earnings performance. Instead, investors should monitor the company’s developments closely for an appropriate entry point.
Image: Shutterstock
Delta (DAL) Falls 11% in a Month: Thinking of Buying the Dip?
Shares of Atlanta, GA-based airline heavyweight Delta Air Lines (DAL - Free Report) have not had a good time on the bourses of late, declining 11.2% over the past 30 days. Even though DAL has outperformed its industry in a month, the company has underperformed the S&P 500, of which the airline is a key member. Additionally, while DAL’s price performance compares favorably with that of United Airlines (UAL - Free Report) , it is poor compared with American Airlines (AAL - Free Report) in the same timeframe.
One-Month Price Comparison
DAL is currently trading at a 29.2% discount to its 52-week high of $53.86 reached on May 13, 2024.
Given the significant pullback in Delta’s shares, investors might be tempted to snap up the stock. But is this the right time to buy DAL? Let’s find out.
Delta – The Hardest-Hit U.S. Airline Due to the Microsoft Outage
The global IT outage on Jul 19 impacted Delta greatly, resulting in multiple flight cancellations. Other U.S. airlines like American Airlines and United Airlines recovered much more quickly from the setback. Delta was the hardest hit and recovered only recently. DAL’s prolonged crisis was due to its dependence on Microsoft (MSFT - Free Report) systems for flight crew scheduling. As a result of one of DAL’s crew tracking-related tools being affected, the rescheduling of the airline’s multiple canceled flights became difficult, given the uncertainty surrounding the arrangement of a full crew.
Per CEO Ed Bastian, the outage cost DAL approximately $500 million over the course of five days. DAL not only had to refund tickets for the canceled flights but also had to spend significantly on hotel accommodations and other compensation for its customers impacted by the outage. According to the CEO, the severity of the impact left DAL with “no choice" but to seek outage-related damages.
The Jul 19 outage, which had crippled DAL’s operations, was caused by a CrowdStrike (CRWD - Free Report) software update. CrowdStrike is a security software provider.
Q2 Earnings Miss & Dismal Q3 View
On Jul 11, Delta initiated the second-quarter 2024 earnings season for the airline space. Quarterly earnings of $2.36 per share fell short of the Zacks Consensus Estimate of $2.37.
Earnings decreased 11.9% on a year-over-year basis. Apart from high costs, the carrier blamed the discounting pressure at the low end of the market, which hurt its pricing power, for the disappointing bottom-line performance. The airline also gave a bearish earnings per share view for the September quarter, with management expecting adjusted earnings per share between $1.70 and $2.00.
The practice of price cuts by low-cost carriers, as they struggle to fill the excess seats this summer, is hurting even bigger rivals. Discount carriers have added too many seats that they are now attempting to fill by lowering fares and compelling airline majors to do the same to stay competitive.
Other Notable Headwinds
The increase in oil price is not a welcome development for the company as fuel expenses represent a key input cost for any airline player. The production cut announced by major oil-producing nations and geopolitical tensions directly impact Delta. As of now, third-quarter 2024 oil prices are expected to be in the $2.60-$2.80 band, which will affect the company’s profitability.
The northward movement in labor expenses is also hurting DAL’s bottom line by pushing up operating costs. The March 2023 agreement with pilots meant continued increases in non-fuel unit costs (likely to increase in the 1-2% band year on year in the September quarter).
Given the headwinds surrounding the stock, earnings estimates are southbound, as shown below.
Silver Linings
Among the positives, upbeat passenger volumes bode well for DAL. While air travel demand is particularly strong on the leisure front, business travel has also made an encouraging comeback. Driven by upbeat air travel demand, DAL’s top line increased 6.9% year over year in the second quarter of 2024. This was driven by a 5% rise in passenger revenues.
In June, DAL hiked its quarterly dividend by 50% to 15 cents per share, highlighting its financial bliss. Financial prosperity owing to strong passenger revenues may have led to the dividend hike. The airline ended the second quarter of 2024 with cash and cash equivalents of $4.23 billion, much higher than the current debt level of $2.95 billion. This implies that the company has sufficient cash to meet its current debt obligations.
From a valuation perspective, DAL is trading at a discount compared to the industry, going by trailing 12-month EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization), a commonly used multiple for valuing airline stocks. The reading is also below its median over the last five years. The company has a Value Score of A.
To Sum Up
Agreed that the stock is attractively valued and upbeat passenger revenues are serving DAL well. However, given the abovementioned headwinds, we believe that it is not at all advisable to buy the dip in this Zacks Rank #4 (Sell) stock until the company demonstrates substantial improvement in its earnings performance. Instead, investors should monitor the company’s developments closely for an appropriate entry point.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.