Delta Air Lines (DAL) is scheduled to report earnings Thursday morning and the company is facing higher oil prices that could hamper its outlook. The company will host a conference call at 10:00 AM ET to discuss the results.
Analysts expect Delta to earn $1.76 per share on revenue of $11.97 billion. The EPS estimate has been adjusted downward from $1.78 over the past week, so analysts have been lowering the bar slightly.
Oil prices rose in the third quarter and have reached their highest level since 2014. Delta does using hedging practices in an attempt to protect itself from rising oil prices, but it likely had some impact in the third quarter.
Delta has seen its earnings grow by an average of 4% annually over the past three years and in the second quarter earnings grew by 11%. Analysts are predicting overall earnings growth of 15% for 2018 as a whole. Sales grew by 10% in the second quarter and have averaged growth of 1% over the last three years.
Delta recently announced that it carried 15.2 million passengers in September, a record for the month. It also set monthly records for the months of July and August. The trend for the number of passengers carried is obviously higher and that could help the earnings’ report.
Delta’s profitability measurements show a return on equity of 26.6%, a profit margin of 12.9%, and an operating margin of 12.8%.
Overall expenses for Delta jumped by 6.8% from 2016 to 2017 and they could jump by a greater percentage this year. Fuel prices increased in 2017, but so far the increases in 2018 have been even greater.
Analysts are Extremely Bullish on Delta
Turning our attention to the sentiment toward Delta, we get a bit of a mixed picture. The short interest ratio is at 4.47 and that is close to what I consider high. The ratio did move down slightly from the end of August report to the mid-September report.
While short sellers are leaning toward the pessimistic side, analysts are quite the opposite. There are 18 analysts following Delta and all 18 rate the stock as a “buy” or better. Breaking it down a little further, there are seven “strong buy” ratings and 11 regular “buy” ratings. It has been a while since I have seen a stock with nothing but buy ratings on it.
The put/call ratio on Delta currently sits at 0.796 and that is more of a neutral reading. The ratio was at 0.93 back in July when the company last reported earnings. It dipped through mid-September and has moved up slightly in recent weeks. Currently there are 171,654 puts open and 215,726 calls open.
Upwardly Sloped Trend Channel Defines the Last Two Years
Delta has been trending higher over the last two years and a trend channel has defined the stock’s movements. The stock just hit the upper rail of the channel two weeks ago and it has moved sharply lower since hitting the upper rail.
Looking at the weekly oscillators, both the 10-week RSI and the weekly stochastic readings were hitting overbought levels prior to the two-week dip. The drop coincided with a jump in Brent crude prices that moved above the $80 level. The correlation between jet fuel prices and Brent crude is high.
In addition to the jump in fuel prices, Delta recently announced that it expects to take a $30 million hit from Hurricane Florence and that is likely the reason the EPS estimate has been moved down a little.
My Overall Assessment of Delta
I can’t say that I am a big fan of Delta as a long-term investment. The fundamentals are slightly above average with the return on equity and profit margin being decent, but the earnings and sales growth are below average.
The sentiment toward Delta is a mix with short sellers slightly pessimistic and analysts are extremely bullish on the stock. Option traders are neutral to slightly pessimistic.
The technical performance isn’t that great either. The stock has lagged the S&P 500 over the past year and other airlines have outperformed it, specifically United Continental.
Because of the strong passenger numbers from July, August, and September, I can see Delta beating the earnings estimates, but I also wouldn’t be surprised if the outlook is disappointing due to fuel costs rising.
The long-term outlook for Delta isn’t that great as far as I am concerned. I can see the stock possibly dropping down to the lower rail of the channel and maybe getting a tradable bounce off of that.
The stock could also see some support at the $50 level. If you look back to the end of 2015 you see that area acting as resistance and then it took another year for the stock to get back to that level. It took the stock several attempts and almost six months to finally move above the $50 mark.
If Delta’s sales and earnings growth are so sluggish while the economy is as strong as it has been in the last few years, I am concerned about the growth when we see the economy contract. For this reason, I would not be looking to add Delta as a long-term holding, but like I expressed, you might see a short-term bounce around the lower rail and the $50 level.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.