Analyst Insights

Citi Sees Opportunity to Fly Delta Air Lines Q2 Results: Reiterates Buy Rating

Delta trades lower after missing Q2 EPS estimates but Citi sets a price target of $65, highlighting Delta's revenue diversity and operational efficiency

By Harrison Wall

7/11, 09:34 EDT


Stock Rating: Buy
Revised Price Target: $65.00
Stock Price (July 11, 2024): $42.55

Summary Points

  • Delta Air Lines reported strong Q2 results with $2.36 EPS and $1.3B free cash flow, maintaining full-year EPS guidance of $6-$7.

  • Citi reiterates positive outlook on Delta, citing revenue diversity as a key advantage with 56% from loyalty, premium cabins, and cargo.

  • Delta's strategic focus on operational efficiency and diverse revenue streams positions it well for continued growth despite market volatility.

Strong 2Q Performance and Positive Full-Year Guidance

Delta Air Lines (DAL) reported a solid second quarter for 2024, with an adjusted EPS of $2.36, closely aligning with market expectations. Despite a slight miss on Bloomberg consensus by one cent, the results were fundamentally positive, showcasing double-digit EBIT margins and a robust free cash flow (FCF) of $1.3 billion for the quarter. Additionally, Delta's management demonstrated confidence by increasing the quarterly cash dividend by 50%. Citi's report suggests that any dips in Delta's share price should be viewed as buying opportunities, given the airline's strong performance and optimistic full-year guidance.

Revised Price Targets and Stock Ratings

Citi maintains a positive outlook on Delta, reiterating a full-year EPS guidance of $6 to $7 and projecting a free cash flow of $3 billion to $4 billion. The investment thesis is supported by Delta's diverse revenue streams and strong operational metrics. Citi's 3Q'24 estimates include an EPS of $1.99, slightly below the Yahoo consensus of $2.06, but the full-year EPS estimate of $6.55 is closely aligned with the consensus of $6.58. The report underscores Delta's competitive advantage, stating, "Delta’s revenue diversity screens as a key competitive advantage, with loyalty, co-branded card, premium cabin, air cargo, etc. comprising 56% of the carrier’s revenue."

Revenue Diversity and Operational Efficiency

Delta's second-quarter performance was driven by several key factors. The airline deployed 74.7 billion available seat miles (ASMs), with a total revenue per available seat mile (TRASM) of 20.64 cents, slightly below Citi's estimate of 21.1 cents. However, Delta's ex-fuel cost per available seat mile (CASM) was 13.14 cents, better than the estimated 13.35 cents. Fuel costs also came in lower than expected at $2.64 per gallon, contributing to a pre-tax margin of 13%, in line with Citi's projections. For the third quarter, Delta is guiding for ASM growth of 5% to 6%, revenue growth of 2% to 4%, and an EBIT margin of 11% to 13%, with an EPS range of $1.70 to $2.00.

Strategic Focus and Market Dynamics

Delta's strategic focus on revenue diversity and operational efficiency positions it well in the competitive airline industry. The company's diverse revenue streams, including loyalty programs, co-branded credit cards, premium cabins, and air cargo, account for 56% of its total revenue. This diversity provides a buffer against market volatility and enhances Delta's competitive edge. Citi's cautious stance on the third quarter, partly due to the impact of the Paris Olympics, does not overshadow the overall positive outlook for Delta. The report highlights, "Although Citi has been a little more cautious than the street on 3Q, partially owing to the impact of the Paris Olympics, Delta’s overall outlook seems very encouraging."

Valuation Recap and Future Outlook

Citi's valuation of Delta remains robust, with a full-year EPS estimate of $6.55 and a projected free cash flow of $3 billion to $4 billion. The key valuation metrics include a double-digit EBIT margin and a strong balance sheet, with adjusted debt to EBITDAR expected to be between 2x to 3x. The primary risks to this valuation include potential fluctuations in fuel prices, changes in consumer travel behavior, and macroeconomic factors such as inflation and consumer spending. However, Delta's strategic initiatives and diverse revenue streams mitigate these risks, positioning the airline for continued growth and financial stability.

"We would treat share price dips as buying opportunities in Delta," says the Citi Analyst.