Why Delta Air Lines Stock Is a Strong Buy Post-Earnings

After an excellent run over the last three months (up almost 40%), Delta Air Lines (DAL 0.08%) stock sold off a bit after the company released its second-quarter earnings. However, it looks more like a round of sell-off-on-the-news rather than any verdict on the earnings. In fact, the earnings and guidance upgrade was excellent, and Delta's stock has room to run. Here's why.

Delta Air Lines's earnings momentum 

The strengthening trend in Delta Air Lines's business can be seen in the Q2 year-over-year revenue growth of 19%. Just a couple of weeks earlier, Delta held its 2023 investor day and upgraded expectations for revenue growth to come in at 17% to 18% compared to prior guidance of 15% to 17%.  

If the air travel market is set to slow in response to rising interest rates crimping consumer discretionary spending, it certainly hasn't been seen in Delta's earnings yet. There was more good news from the updated full-year guidance, as management raised profit margin and earnings expectations again, having raised them on the investor day in late June. 

Data source: Delta Air Lines.

CEO Ed Bastian also noted, "We are currently executing ahead of our three-year financial plan and are well positioned to achieve our 2024 earnings target of over $7 per share" on the earnings call. He reiterated expectations for free cash flow (FCF) generation of $10 billion cumulatively from 2023 to 2025. Given that the guidance is for $3 billion in FCF in 2023 and more than $4 billion in 2024, the $10 billion in 2023 to 2025 appears to be conservative. 

Derisking Delta Air Lines stock

The improved earnings and FCF aren't just good for penciling in valuations for the company and increasing stock price targets; they also help to derisk the stock by enabling management to reduce its net debt. As a reminder, airlines' debt ballooned as a result of the travel restrictions imposed on the populace by governments, while FCF collapsed. 

However, now that FCF is coming back strongly, Delta is repaying debt early ($3 billion in the first half) and appears to be on track with its debt-reduction plans. 

The current plan is to reduce its adjusted debt to earnings before interest, taxation, depreciation, and restructuring (EBITDAR) from 5 times EBITDAR at the end of 2022 to 3 times at the end of 2023 and then less than 2.5 times at the end of 2024. Considering that it's already at 3.2 times on a 12-month trailing basis, Delta is well on track. 

Data by YCharts.

It's a significant achievement, and it's helping derisk the company from its substantive debt load.

Moving beyond 2019

While the market has focused on recovering to 2019 levels of traffic (the last year before the pandemic), there are other arguments that suggest Delta is well-placed to grow in the coming years. For example, Bastian noted, "[W]e lose sight of the fact that our economy is 20% plus or minus larger than it was in 2019." In other words, it's not just about recovering capacity and flight departures to 2019 levels; there's also an opportunity for growth in the kind of higher-margin corporate travel that Delta generates profit from. 

Moreover, President Glen Hauenstein cited corporate surveys indicating that "businesses expect to increase travel in the second half with several of the least recovered sectors conveying optimism or increased travel in the fall." 

If that transpires, then there's an opportunity for upside potential to Delta's profit margins and profits as it caters more toward the corporate traveler than, say, the budget airlines. 

Image source: Getty Images.

Is Delta Air Lines stock a buy?

All told, the FCF and debt repayment are derisking the stock, and there's a long runway of growth ahead for Delta, notably in the corporate market. The weakness in the stock price post-earnings looks like a decent buying opportunity.