Delta Air Lines: A buy-the-dip stock with ample upside

Delta Air Lines NYSE: DAL shares fell more than 5% following the Q4 earnings release, creating a buy-the-dip opportunity. The release contained nothing but good news and an optimistic outlook but fell short of expectations in one way. The guidance, calling for EPS growth, is shy of the long-term $7 per share target, leaving the market wanting more. 

However, with tepid guidance compared to the long-term target, the company is on track to achieve its goal and could easily do so this year. Delta had a record-setting quarter in 2023, reports solid demand with an expectation for growth and is leaning into efficiencies this year. It will retain its top position among airlines.

Delta had a record-setting year in 2023

Delta had a solid year in 2023, with global demand solid in all segments. The company's push toward revenue and service quality played a significant role, leading Q4 revenue to a 5.8% gain. The $14.22 billion in revenue is also above the consensus estimate, with strength reaching the bottom line. 

Company CEO Glen Hauenstein says a pivotal shift in domestic demand was compounded by strong international demand supported by business and leisure travel. Premium and non-ticket sales, the company's growth and margin pillar, expanded by 15% and is 55% of the revenue.

The margin news is a little mixed, with the Q4 adjusted margin coming under pressure due to an increased cost-per-average-seat-mile. That said, the 9.7% adjusted operating margin is above expectations and delivered a solid result on the bottom line. The $1.28 in adjusted earnings is down YOY due to the contraction but 12 cents or 1,000 basis points better than expected. 

Guidance is also solid. The company forecasts full-year revenue and earnings in a range bracketing the consensus estimate and is likely to outperform on the bottom line. Today's salient point for investors is that FCF is expected to double at the high end, enhancing the capital return outlook. Delta reinstated its dividend two quarters ago and should make its next declaration soon. That declaration may not include an increase, but increases are expected in 2024. 

As it is, the company is paying less than 10% of quarterly adjusted earnings, so it has room in the numbers to make a sizeable increase. However, the company is also working hard to pay the debt incurred due to the pandemic and raise its credit rating to investment grade. Efforts in 2023 included $4.1 billion in debt payments, bringing leverage down to 3x from 5x. Balance sheet improvements may accelerate because the cash flow will grow by 50% to 100% this year. 

Analysts put a floor in Delta stock

Analysts have yet to issue revisions based on the Q4 results and guidance but are on board the Delta Air Lines story. The consensus of 10 analysts tracked by MarketBeat is a firm "buy," steady all year, with a consensus price target on the rise. The consensus increased every quarter of 2023 and forecasts a 35% upside with shares near $40. Perhaps more importantly, the low end of the analysts' range is $40, putting a floor in the market. Among the risks for investors is that analysts will lower their targets, including the low-end and undermine market strength. 

Delta shares fell sharply in premarket trading but have not entered correction yet. The move fell to the consensus estimate consistent with the 150-day EMA, a target for critical support. Assuming support holds at this level, shares of Delta should move sideways from here if a rebound does not form soon. 

Because institutions were buying Delta shares on balance throughout 2024, only turning slightly bearish in Q4, long-term and sell-side money will likely step and support this stock. If not, this stock could return toward firmer support levels in the $32 to $38 region.