Delta 3rd Quarter Earnings Release

The start of earnings season kicks off this year with Delta Airlines leading the way. With a watch list of close to 30 stocks that we watch here I am excited to talk about Delta a bit today as they are a name and brand that we all recognize.

Often times we feel more comfortable investing in names that we feel are going to be around for a long time over a stock that has a short history and may not be around 5 or 10 years down the line.

So lets take a quick look at the three main points that we focus on when trading a stock which are the Fundamentals, the Technicals and any news releases. Let’s just go ahead and start with the news being that its the main attraction today.

NEWS

Today delta has reported their financial results for the third quarter of 2019. They also took the time to outline the projected goals for the fourth quarter of the year.

  • Pre-tax income increased by $361 M or 22%
  • Adjusted Earnings per share were $2.32 which is a 29% gain year over year.
  • Generated $7.5 billion in operating cash flow and $4 billion of free cash flow on a year-to-date basis. A total of $3.5 billion has been invested back into the business for new aircraft purchases and modification
  • Total Revenue which excludes refinery sales grew 6.5% as the company recorded 55.2 million passengers in the quarter hitting a new record.
  • Returned $468 M to shareholders

Statement from Delta:
“Our powerful brand and competitive strengths drove another quarter of great results for our people, customers and owners. Our people bring our brand to life on every flight and I’m pleased to recognize their outstanding efforts with over $1 billion in profit sharing accrued so far this year,” said Ed Bastian, Delta’s chief executive officer. “Demand for the Delta product remains healthy, positioning the company for a strong close to 2019 with expectations for more than 20% earnings growth, over $4 billion in free cash flow and a 5th year of pre-tax earnings over $5 billion.”


Delta continues to have an optimistic outlook for the next quarter as they plan to continue to expand into new market while adding additional aircraft to their fleet.


4Q19 Forecast
Earnings per share$1.20 – $1.50
Pre-tax margin9.5% – 11.5%
Fuel price, including taxes and refinery impact$2.00 – $2.20
TRASM, adjusted (year-over-year)Up 0% – 2%
CASM – Ex (year-over-year)Up 4% – 5%
System Capacity (year-over-year)Up ~4.5%

One of the strongest factors this last month that we are looking into is their Strategic Partnership with LATAM Airlines. After digging back into the news the deal is still not approved by regulatory bodies. The completed deal will approve from Delta to Purchase a 20% stake in LATAM through a $1.9 billion investment through a public tender offer at $16 per share. They have added on that to better support the strategic partnership, Delta would look to purchase a total of 14 A350 aircraft from LATAM.


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Fundamentals

Delta focuses their business on 5 key strategic pillars. Culture and People, Operational Reliability, Network and Partnerships, Customer Experience and Loyalty, and Investment Grade Balance Sheet.

Let’s break down quickly how Delta has managed to achieve various milestones in each category.

Culture and People

Delta rewarded individuals through $517 M in profit sharing as well as paid $12 M in shared rewards through the company to give thanks and recognized the hard work by the 80,000 staff members through the hot summer months. They announced a 4% base pay increase for ground and flight attendant employees and specifically rewarded those who practice industry-leader performance.

Operational Reliability

The airline carried an all-time record of 55.2 million individuals which is 6% greater than the previous year. Delivered 202 Days of zero mainline cancellations. This is a 12% improvement from the previous year.

Network and Partnerships

The Partnership with LATAM could strengthen the ties between North and South america and would serve over 435 locations with the two airlines working together. The expansion of new trans-Atlantic flights to enter service in 2020 for routes like Boston to Rome, London-Gatwick and Manchester will broaden the options of non-stop flights that can be offered to individuals.

Customer Experience and Loyalty

The system that is used with their Delta SkyMiles American Express Cards are being redesigned to create new and unique ways for individuals to enhance their flying experience. The latest Fly Delta App allows for individuals to gain flight specific information to ensure their journey is seamless. The app also allows for the option to pre-select your on board meal and select your seat for any Delta or Delta connection aircraft.

Investment Grade Balance Sheet

For a full breakdown of their Earnings Release I encourage you to go direction to the DELTA website to be able to look at their official release of their numbers. Most of the values are not audited for the time being and reflect their own personal bookkeeping. Overall based on the data there shows to be strong optimism towards the growth of Delta Airlines in the upcoming years.

Technicals

Price dropped down and is currently testing at the support level of above $52. At the start of the morning on the 10th during pre-market trading we are seeing a sell off in Delta stocks. At first I was a bit shocked as most of the news that we covered has shown a growth in value and routes.

Although there is signs of expansion the report was not a strong as many investors were looking for. The overall projections for growth have slowed down which is also bringing investors to slow down their entry of new positions.

With price rejecting down towards $52 we would need to see a confirmed break underneath $52 before we continue on the downside movement. For those who are looking for the bias outlook after the earnings report and aim to capitolize on the fast movement of the stock to the potential downside this is a great opportunity to purchase the $52 Put expiring next week for DELTA.

The fact that we are currently trading above $52 would mean that the premium to purchase the option would be lower than a Put with a strike price way under the current stock price. Since the put is close to the current price this means that the volatility of the value of the option is extremely high.

The possibility that the stock pushes up is very possible. Should this happen the option could expire worthless resulting in a total loss of premium.

The potential gain towards the downside remains optimistic as we have had major selling pressure recently and although there is great outlook and optimism towards the new partnerships with South American airlines, nothing is set in stone yet.

If the Put option for DAL is currently trading at under $1.00 per contract this puts it in a great place as any movement underneath $52 would bring the value of the contract to match the difference between the strike price and the stocks price. So an option that is currently worth about $.67 a contract could raise in price by close to 200% should the stock price drop down towards $50.

As always make sure to comment below what your thoughts are on Delta After the opening bell of the market. Will we continue on our pre-market war path to new lows or can we respect the support level and push up towards new highs? I will be posting up a video analysis later today so many sure to check it out! As always happy trading!

As a disclaimer all trade ideas are for education purposes and not meant to be used as financial advise. All investing involve risks, including loss of principal. Past performances do not guarantee future results or success. Stock and Forex markets are volatile and can decline significantly in response to adverse regulatory, market, economic development. Asset allocation and diversification do not eliminate risk. All Content is used for illustrative purposes and for educational use only.

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