Can Delta Air Lines Stock Soar in Q4 of 2022?
October 16 2022 - 4:44PM
Finscreener.org
Shares of Delta
Air Lines (NYSE:
DAL) experienced an uptick on October 13 after the
company announced quarterly results for Q3 of 2022. In the
September quarter, Delta reported revenue of $12.84 billion and
adjusted earnings of $1.51 per share. Analysts comparatively
forecast the airline giant to report revenue of $12.87 billion and
adjusted earnings of $1.53 per share in Q3.
Despite the earnings and revenue
miss, DAL stock gained momentum on the back of bullish management
guidance for the upcoming holiday season. Let’s see what Delta Air
Lines expects in the near term and what drove its financials in
Q3.
Delta Airlines expects to report a net profit in
Q4
Delta Air Lines stated it
expected to report a profit in Q4 of 2022, as well, as demand for
leisure and business travel continues to recover from the depths of
the pandemic. Company CEO Ed Bastian explained, “Global demand is
continuing to ramp as consumers shift spend to experiences,
businesses return to travel and international markets continue to
reopen. Demand has not come close to being quenched by a hectic
summer travel season.”
Delta Air Lines was the first
U.S. airline carrier to report its Q3 results, and its upbeat
guidance surprised investors as most other industries are wrestling
with rising fuel prices and higher inflation numbers.
In the December quarter, Delta
estimated adjusted earnings between $1 and $1.25 per share and
forecast revenue to increase between 5% and 9% compared to the same
period in 2019.
Delta reported a net income of
$695 million in the September quarter and an operating profit of
$1.5 billion, indicating an operating margin of 12%, which is quite
healthy.
The airline giant also
emphasized, “With capacity expected to be 91 to 92 percent restored
to 2019 in the December quarter, non-fuel unit costs are expected
to be 12 to 13 percent higher, improving 10 points sequentially.
Improving asset utilization and efficiency remain key priorities as
we move into the final stages of rebuilding the airline and work to
drive a competitive cost structure.”
Delta Air Lines and its peers
have been impacted by rising labor and fuel costs in the last year.
Its fuel bill in Q3 rose 48% from 2019 levels to $3.32 billion.
Even if we exclude fuel costs,
costs per available seat mile
rose 23% in the last three years.
What next for DAL stock and investors?
The onset of COVID-19 brought
international and domestic travel to a standstill. As the airline
industry is capital intensive,
Delta and its peers
raised debt capital to offset high
cash burn rates.
But rising interest rates and
inflation will be headwinds for those with high debt balances and
weak balance sheets.
In Q3, Delta Air Lines repaid
debt amounting to $1.8 billion, and this amount stood at $4 billion
year-to-date. It ended the quarter with a debt of $33.7 billion and
$10.77 billion in cash. Delta has targeted adjusted net debt of $15
billion and investment grade metrics by 2024. Its adjusted net debt
currently stands at $20.5 billion.
Due to a debt-heavy balance
sheet, Delta Air Lines is still reporting a negative free cash
flow. Its operating cash flow stood at $869 million, while capital
expenditure rose to $1.5 billion in Q3.
Additionally, the company’s
payments on debt and finance lease obligations totaled $4.2 billion
in 2022.
Delta Air Lines expects adjusted
earnings per share to improve to $7 in 2024, with a free cash flow
of $4 billion. So, DAL stock is currently priced at 4.8 times its
2024 free cash flow and just 4.3 times its forward earnings, which
is quite cheap.
Due to its attractive multiple,
DAL stock price is trading at a discount of more than 50% compared
to consensus price target estimates.
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