Should Delta Air Lines Stock Investors Expect Takeoff Or Turbulence?

DAL stock - Should Delta Air Lines Stock Investors Expect Takeoff Or Turbulence?

Source: via Delta

This week’s earnings release by Delta Air Lines (NYSE:DAL) was not much of a surprise. The company had issued an earnings warning on Jan. 3 — cutting its unit revenue estimates down to about 3% from the prior estimate of 3.5%. There was a silver lining along with that warning: earnings would likely come in at the high end of October guidance. Still, DAL stock got hit hard when the results finally came.

There was also a sell-off in Delta’s airline peers, including in American Airlines Group (NASDAQ:AAL) and United Continental Holdings (NASDAQ:UAL).

OK, then, what were the final fourth-quarter numbers? Well, overall revenues rose by 5% to $10.74 billion and earnings were $1.02 billion, or $1.49 per share. When adjusting for one-time factors, the earnings came to $1.30 per share. As for the Street consensus, it was for $10.72 billion on the top line and $1.28 per share for profits. And unit revenue increased by about 3.2%.

So, yes, on the news there was little impact on DAL stock. Yet, since mid-November, the shares have lost 15% of their value versus a 4.4% decline in the S&P 500 index.

Delta Faces a Bumpy Ride

Now going forward, there are likely to be more problems for DAL stock as the company is facing several headwinds. Note that the forecast for the current quarter is for earnings to range from 70 cents to 90 cents a share. Yet Wall Street had estimates for 74 cents a share. Oh, and Delta also announced that unit revenue would be flat to 2%.

Part of this is due to a slowdown in the global economy, which is putting pressure on demand for travel. A stronger U.S. dollar isn’t helping much, either.

But curiously, the steep drop in oil prices may be another factor. Why? Airlines may get too aggressive in lowering prices. Let’s face it, the business is notorious for being hyper competitive and susceptible to price wars.

Although, perhaps the biggest wild card for DAL stock is the partial shutdown of the federal government. On the earnings call, the company’s CEO, Ed Bastian, said that this could cost the airline roughly $25 million per month. The shutdown will also mean a delay in the rollout of Delta’s new Airbus A220 aircraft, since the FAA officials have been furloughed.

Being a good corporate citizen, the CEO also noted that Delta is working closely with TSA on steps to minimize travel delays, including mobilizing Delta employees to perform non-essential aspects of the security process. “We strongly encourage our elected officials to do their very best to resolve their differences and get our government fully opened as quickly as possible,” he said.

Bottom Line on DAL Stock

It’s true that DAL stock is fairly cheap right now. The forward price-to-earnings multiple is at a mere 7x. What’s more, the company has a decent dividend yield, at about 2.9%, and there continues to be strong cash flow. Last year, that came to about $6.9 billion.

Wall Street is also upbeat on Delta Airlines stock, with the average price target at $67. This assumes about 37% potential upside from current levels.

No doubt, this is all encouraging. But I still think there should be caution with DAL stock. Again, it’s far from clear how the shutdown will turn out and there may be more competitive pressures across the airline industry. In other words, DAL stock could stay cheap, at least for the near term.

Tom Taulli is the author of High-Profit IPO StrategiesAll About Commodities and All About Short SellingFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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