Delta had a solid quarter, overcoming a revenue hit from the CrowdStrike outage over the summer.
Delta Air Lines (NYSE:DAL) stock was trending lower for most of the day on Thursday, despite turning in a strong third quarter earnings report.
The nation’s second largest airline generated $15.7 billion in revenue, up about 1% year over year. The revenue numbers were some 8% higher than estimates of $14.6 billion. Net income rose 15% year over year to $1.27 billion, or $1.97 per share, which was some 30% higher than the $1.52 EPS estimate.
Delta stock opened about 3% lower, but gradually clawed back the losses as the day wore on. By the afternoon, it was moving higher, up about 0.2% to around $51 per share. What caused the volatility, and does this present a buying opportunity for investors?
Overcoming CrowdStrike outage
The September quarter numbers were all the more impressive when you consider the financial impact of the CrowdStrike outage that occurred on August 8. Delta took a $380 million revenue hit, mainly from refunding customers for cancelled flights, offset by $50 million in lower fuel expenses, and other non-fuel expenses. Overall, it resulted in a 45 cents per share reduction in earnings.
However, Delta overcame that with significant gains in its premium and loyalty base of customers, which made up 57 percent of total revenue in the quarter. The premium revenue growth outpaced main cabin revenue for both domestic and international flights. Also, loyalty revenue grew 6 percent year-over-year, fueled by award redemptions and co-brand card spend growth.
Further, Delta benefitted from a 7% increase in revenue from the corporate travel segment. Delta saw the most demand from technology, media, and banking corporations, all of which delivered double-digit growth.
“Through the September quarter, unit revenue growth improved sequentially in all geographic entities, reflecting an improved equilibrium between demand and supply as industry growth moderated,” Glen Hauenstein, Delta’s president, said.
Outlook is good, but falls short of estimates
Delta provided guidance for the fourth quarter, calling for a 2% to 4% increase in revenue in the quarter, year over year, with capacity growth of 3% to 4%.
Hauenstein said the company expects travel to slow down around the election, resulting in a 1-point impact on total unit revenue. However, this should be offset by a strong holiday season.
Earnings are expected to be between $1.60 and $1.85 per share in Q4, which some investors may have viewed as disappointing. Not only is it down from Q3, but the midpoint is slightly below Wall Street estimates of $1.78 per share. However, the operating margin is anticipated to be 11% to 13% in Q4, which would be up from 8.9% in the third quarter.
Delta executives anticipate a strong fourth quarter.
“We expect our December quarter pre-tax profit to grow 30 percent over last year to $1.4 billion, which would mark one of the most profitable fourth quarters in our history,” Ed Bastian, Delta’s CEO, said.
Is Delta stock a buy?
The pre-market and early morning selloff appears to be a bit overblown, based on Delta’s solid quarter and decent outlook. That is probably why the stock price steadily moved higher as the day progressed, ultimately ending up in positive territory by the afternoon.
Lower inflation and a stronger than expected economy should bode well for travel, and Delta, heading into 2025, particularly as it capitalizes on its segment leading on-time performance and strong growth in its premium and loyalty segments. It also expects corporate travel demand to increase in 2025.
Delta stock remains a buy according to most analysts, with a price target of $60 per share, which would represent a 19% increase. I certainly cannot argue with that, as the airline has been a strong performer and enjoys key advantages. The stock is also dirt cheap, with a P/E ratio of 7, so, dip or no dip, it is still a solid buy.
