Delta’s earnings showed strong demand amid serious operational headwinds. Is it a purchase?

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Earlier this week, Delta Air Lines (NYSE: DAL) set the tone for the airline industry’s quarterly reporting season. In line with the gloomy outlook for the sector, DAL released a mixed report, triggering an uncertain reaction among investors.

DAL and its competitors are hoping to take advantage of a post-pandemic surge in demand. However, this consumer interest comes against a backdrop of rising fuel prices, staff shortages and the possibility of a recession in the near future. Given these cross-currents, does the DAL represent a buying opportunity at these levels?

Return of Demand Vs. Macro Headwinds

As the COVID outbreak brought most travel to a halt in 2020, shares of DAL and its peers suffered a selloff. The DAL reached below $20 in the middle of this year, but then began a recovery as restrictions were slowly removed. The stock has been climbing in the second half of 2020 and into 2021, reaching above $50 in March.

Since then, the stock has seen pockets of severe turbulence. As consumer demand has returned, 2022 has seen soaring fuel prices and continued staff shortages, which has forced DAL to announce a series of high-profile flight cancellations. In total, the DAL is down around 24% in 2022, trading around $30 during Friday’s intraday action.

This drop is well in the middle of the pack for the sector. For example, American (AAL) posted a similar pullback of around 23%. Meanwhile, JetBlue (JBLU) saw a significantly steeper fall in 2022 than most of its competitors, plunging 45% amid a Spirit (SAVE) bidding war.

Elsewhere, United (UAL) and Southwest (LUV) have held up better than most of their peers, although both also posted notable declines in 2022. LUV fell around 10%, while UAL fell about 19%.

On the earnings front, DAL released second quarter results earlier this week. The company achieved non-GAAP EPS of $1.44 in the second quarter, which missed estimates by $0.28. However, the airline beat revenue forecasts, posting revenue of $13.8 billion, about $400 million above consensus. Turnover increased by almost 94% compared to the previous year.

Following the report, Delta CEO Ed Bastian commented on the bumpy return to normal operations the company has been experiencing lately. He said the company’s mixed earnings report came as the airline industry “stretched” to pick up as much demand as possible in the wake of the pandemic, creating “a bit of stress operational”.

Meanwhile, fuel costs continue to be a significant headwind for the carrier. The average price of fuel per gallon has climbed 80% since 2019. Oil prices continue to remain high but have now fallen back below $100/bbl.

Does DAL buy?

Wall Street analysts are overwhelmingly bullish on Delta (DAL), with most betting the company will fix its operational issues to capture growing demand. Of the 20 analysts polled by Seeking Alpha, 13 maintain strong buy ratings, while another five have issued a buy rating.

Two analysts rate the stock as a Hold, while neither currently classifies it as a Sell or a Strong Sell.

Seeking Alpha’s quantitative ratings largely agree with Street’s consensus, the system calling DAL a buy. DAL receives an A- for profitability and a B for growth. Quantitative ratings give the stock a C for valuation and a C- for momentum.

See a breakdown below:

In addition to Quant ratings from Wall Street and Seeking Alpha, Seeking Alpha contributor Dhierin Bechai outlines a bullish case indicating that Delta Air Lines. Bechai said DAL, like any airline, faces a difficult staffing and cost control environment, but is in a better position than others. Meanwhile, contributor Mark Schiavo lists DAL as a hold following its second quarter results.

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