Plunging oil prices were supposed to be a considerable tailwind for Delta Air Lines, Inc. (DAL). But, throughout the past year, that tailwind failed to emerge, leaving DAL stock to deal with growing turbulence amid a sputtering global economy.
What’s more, investor and analyst sentiment doesn’t appear to have caught on to the potential danger, creating an opportunity for DAL stock bears heading into this week’s quarterly earnings report.
On the surface, the situation doesn’t appear to be all that bad for DAL stock. Wall Street is forecasting a profit of $1.30 per share from Delta when the airline taxis into the earnings confessional on Thursday. However, expectations have declined in recent months, with analysts citing a strong U.S. dollar and a weak economic growth abroad.
The first warnings signs that Delta may be in a spot of trouble actually emerged last quarter, when the company ended its three-year earnings winning streak, missing the consensus estimate. As a result, EarningsWhisper.com reports that the whisper number for Delta’ first-quarter earnings arrives a penny lower at $1.29 per share.
Still, the brokerage community is clinging to the hope that DAL stock can pull through. Specifically, Thomson/First Call data reveals that 14 of the 15 analysts following Delta rate the airline a “buy” or better. The lone “hold” rating comes from Deutsche Bank, which downgraded DAL stock to “hold” from “buy” on April 1.
Additionally, the 12-month price target of $64.21 for DAL stock represents a sizable premium of more than 38% to Friday’s close.
As you can see, there is ample room for additional downgrades or price-target cuts if weakness continues to creep into Delta’s fundamental outlook.
Delta Stock Chart
Turning to DAL stock options activity, we find that the bulls are running rampant. In fact, the April/May put/call open interest ratio arrives at 0.42, as call open interest more than doubles put open interest among near-term options. This ratio rises slightly to 0.66 for the April series, but there is still a heavy bias toward DAL call options heading into Thursday’s quarterly report.
Click to Enlarge Overall, monthly April 15 series implies are pricing in a potential post earnings move of about 4.75% for DAL stock. This places the upper bound near $48.49, while the lower bound lies at $44.09. A post-earnings rally would push DAL stock past short-term trendline resistance, but leave the shares shy of a key technical hurdle at $50. A downside move, on the other hand, could gain enough momentum in the current market environment to send DAL crashing through former support at $45.
2 Trades for DAL Stock
Put Spread: With DAL stock struggling to make any headway despite lowered expectations and record-low fuel prices, it’s hard to take a bullish stance ahead of earnings — especially when any minor slip in guidance could send many in the bulls’ camp scrambling for cover.
Traders looking to position themselves ahead of Delta’s report might want to consider entering a May $45/$46 bear put spread. At last check, this spread was offered at 45 cents, or $45 per pair of contracts. Breakeven lies at $45.55, while a maximum profit of 55 cents, or $55 per pair of contracts, is possible if DAL stock closes at or below $45 when May options expire.
Call Sell: If betting directly against DAL stock isn’t your style, you might consider entering an April 15 series $50 strike call sell position. Such a trade is especially useful if you already own DAL stock, as it allows you to offset some of your portfolio losses in the event of a selloff, but also allows you exposure to any upside up until the stock trades at or above $50.
At last check, this option was bid at 13 cents, or $13 per contract. A sold call allows you keep the premium as long as DAL stock closes below $50 at expiration. On the downside, if DAL rallies above $50 prior to expiration, you could be forced to provide 100 shares at current market value for each call sold, which could be quite costly if you do not have enough stock on hand to cover the call.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
