Should You Buy Delta Stock Ahead of Q2 Earnings?

Delta Air Lines DAL is scheduled to release second-quarter 2024 results on Jul 11, before market open.

The Zacks Consensus Estimate for second-quarter 2024 earnings was revised downward in the past 60 days and is currently pegged at $2.38 per share. Additionally, the consensus mark implies an 11.2% decline from the year-ago actuals. The Zacks Consensus Estimate for second-quarter 2024 revenues (including revenues related to refinery sales to third parties) is currently pegged at $16.28 billion, suggesting a 4.5% uptick from the year-ago actuals.

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DAL has an awe-inspiring earnings surprise history, as reflected in the chart below.

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Earnings Whispers for Q2

Our proven model does not conclusively predict an earnings beat for Delta Air Lines this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. This is not the case here.

Delta has an Earnings ESP of -1.05% and a Zacks Rank #3.

Factors to Focus on Ahead of Q2 Earnings

We expect upbeat passenger volumes to have boosted DAL's top-line performance in the June quarter. Notably, the majority of passenger revenues are likely to have come from domestic markets. We expect second-quarter passenger revenues to increase 4.2% from the year-ago actuals to $13.75 billion.

Backed by strong booking trends, the company expects quarterly revenues (adjusted to exclude revenue related to refinery sales to third parties) in the $15.3-$15.6 billion band, indicating an increase of 5-7% from second-quarter 2023 actuals.

Driven by high revenues, management expects adjusted operating margin in the quarter under discussion to be in the 14-15% range. We expect the metric to be 14.3%. However, high costs are likely to have hurt the bottom line. Management expects second-quarter 2024 fuel price per gallon in the $2.70-$2.90 band, which is likely to impact the company's profitability. We project the metric to be $2.85 per gallon in the June quarter.

Apart from rising fuel expenses, DAL is also burdened with rising expenses related to non-fuel unit costs. Management expects non-fuel unit cost or cost per available seat mile to increase 2% from second-quarter 2023 actuals. The March 2023 agreement with pilots has meant continued increases in non-fuel unit costs.

Delta Air Lines projects adjusted earnings per share to be between $2.20 and $2.50 for the second quarter of 2024. The midpoint of the guided range (i.e., $2.35) is lower than the Zacks Consensus Estimate of $2.38 per share.

Price Performance & Valuation

Driven by the buoyant air travel demand scenario, the stock has performed impressively on the bourses of late. The DAL stock has appreciated 14.4% on a year-to-date basis, handily topping its industry's 10.3% growth. The S&P 500 composite index rose 17.4% in the same time frame, while the Zacks Transportation sector declined 3.8%.

YTD Price Performance

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Among other airline heavyweights, while United Airlines UAL shares appreciated 13.9%, American Airlines AAL shares have declined 19.7% year to date.

From a valuation perspective, DAL is trading at a relatively cheaper level. Going by its price/sales ratio, the company is trading at a forward sales multiple of 0.48, below its median of 0.57 over the last five years. It is also trading at a discount compared to the industry's 1X. The company has a Value Score of A.

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American Airlines and United Airlines are even more attractively valued, trading at forward sales multiples of 0.13 and 0.26 respectively.

Should You Buy DAL Now?

Upbeat passenger volumes are the primary growth driver for DAL. With air travel demand likely to gain further strength in the ongoing summer season and beyond, DAL stock should remain in good shape. To meet the anticipated demand swell, DAL is expanding capacity. To investors' delight, DAL raised its quarterly dividend by 50% to 15 cents per share.

Despite all this, we don't think it's worth buying the stock at the moment amid certain headwinds.

High fuel and labor costs are likely to limit DAL's bottom-line growth. The company's long-term (3-5 years) earnings growth rate of 10.3% compares unfavorably with its industry's 16%. Moreover, the company's elevated leverage reduces financial flexibility.

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Final Thoughts

We can safely conclude that investors should refrain from rushing to buy DAL, which is facing quite a few challenges, before Thursday. Instead, they should monitor the developments pertaining to the stock closely for a more appropriate entry point, as an erroneous and hasty decision could affect portfolio gains.

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