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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