Atlanta’s Delta Air Lines (NYSE: DAL – $52.44) reported its third-quarter results, turning in earnings that were a nickel above what Wall Street expected, but management’s profit forecast for the current quarter was less upbeat than anticipated. Delta earned $2.31 a share from $12.6 billion in sales compared to $1.80 last year on revenue of $11.9 billion. Wall Street was looking for $2.26 and $12.6 billion, respectively. Management appeared happy with the results as sales grew 6.5% and operating profit margins expanded by almost 3 percentage points. However, Delta expects to earn about $1.35 a share in the fourth quarter compared to last years $1.27 and analysts’ consensus estimates of $1.51 a share. The shortfall on the forecast are sending the shares lower by 2.7% in today’s trading.
Over the past year Delta shares are up 6%, worse than the change of the Dow Industrial Average, but better than most other U.S. airlines. Profits for the airline sector have been solid in 2019, but investors fear a slowing economy could lead to lower profits in the future. That has kept a lid on airline stock prices and valuations. Delta, for instance, trades for just 7.3 times estimated next year’s earnings — a steep discount to other consumer discretionary stocks in the S&P 500.
Looking ahead. The fourth quarter certainly doesn’t look too bad either. Sales guidance is in line with what Wall Street is looking for, and operating profit margins are expected to expand year-over-year. Costs, however, will grow faster in the fourth quarter than in the third quarter, creating the “miss” in guidance, relative to what the Street expected. Non-fuel costs will increase due to recent pay raises and timing of aircraft maintenance events. The fact that the stock trades at a low multiple of earnings and yields 3% should limit the downside, however. The shares remain a good option for those investors willing to participate in the highly competitive and volatile airline industry. Delta’s recent announcement regarding it partnership with LATAM Airlines also bodes well for the company’s long-term growth story.