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Delta Wobbles After Winning Earnings Report

Airlines like Delta (DAL) have had a rough time of things for the last couple years.

After going from completely shut down, to partially reopened, to reopened but with people still hesitant to travel, the earnings reports have been a disaster.

Delta recently posted its own earnings report that turned out better than expected. It issued a few caveats along with it. The combination of massive uncertainty in the travel sector and inflationary pressures leaves me bearish on Delta. (See Insiders’ Hot Stocks on TipRanks)

After leading off the year with closing prices under $40 per share, Delta was on the verge of a renaissance with February’s arrival.

Delta stock went from a closing price of $37.82 on February 1, to a closing price of $50.99 on March 15. From there, it held in the $40-$50 range for the next four months.

A brief dip under $40 hit on July 19, when it closed at $38.56. It recovered until about July 30, and spent most of August with a 50/50 chance of closing under $40 on a given day.

Delta’s earnings report contained two exciting points.

One, Delta posted earnings of $0.30 per share, which was nearly double the expected earnings of $0.17 posted by Refinitiv.

Two, the company also beat estimates on revenue. The company posted $9.2 billion against an expected $8.4 billion.

The icing on the cake for this earnings report was the revelation that this is the company’s second profitable quarter since the pandemic started, and the first profitable quarter without any aid from the federal government.

Wall Street’s Take

Wall Street consensus analysis calls Delta a Moderate Buy. Based on the projections of 17 analysts that have 12-month price targets on the company issued in the last three months, eight consider it a Buy. The remaining nine call it a Sell.

The average Delta price target is currently $54.21, with a high target of $62, and a low of $45. That represents 31.6% upside potential.

Today a Win, Tomorrow a Disaster

There’s no denying that Delta won with its earnings report. This is excellent news, and demonstrates that Delta is making a comeback. In fact, Delta noted that it expects revenue to continue its recovery pattern throughout the rest of 2021. The upcoming holiday travel season should only help matters.

So why did the price slump after the news? Inflation.

Even as Delta released a winner of an earnings report, its subsequent reporting snatched defeat from the jaws of victory. Delta’s subsequent reports note that its profitability will be limited going forward.

This is thanks to rapidly rising fuel prices, and issues of labor shortages. The ongoing vaccine mandates are causing serious problems with labor shortages all over as well.

The labor shortages aren’t likely to improve any time soon, either, especially with companies actively removing the unvaccinated from consideration for employment.

Such stances won’t just mean problems for Delta, but for all of Delta’s suppliers. If jetliner fuel is currently pricey, imagine what happens when the labor shortages from refiners refusing to hire the unvaccinated hit.

Then the issue of spare parts hits, and similar issues crop up all along the line. There are simply too many points of failure for Delta coming up.

Worse yet, Delta officials are only looking for continuing recovery going into what should be the busiest time of year.

Concluding Views

Banking on a recovery in travel would not have been out of line a few months ago. A lot of people were, and with good reason; the training wheels forced on economies the world over were starting to come off, and people could leave their houses without fear of arrest again.

That should have opened up travel, if only partially. People were desperate for a vacation at that point. Throw in the labor shortages and massive price hikes, and suddenly, those who could go had no reason to.

In the end, there are just too many points of failure here. The fact that Delta’s only looking for recovery to continue into what should be its busiest season is distressing. That makes for a bad season coming up for most everything travel-related.

Disclosure: At the time of publication, Steve Anderson did not have a position in any of the securities mentioned in this article.

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