Delta (NYSE: DAL) will report its Q3 2023 results on Thursday, Oct 12. We expect the company’s adjusted revenues to come in at $14.6 billion, in line with the consensus estimate. This would mark year-over-year growth of about 13%. Earnings are likely to come in at about $1.98 on a per-share and adjusted basis, slightly above the $1.94 consensus estimate. See our interactive dashboard analysis on Delta Earnings Preview for more details on how Delta’s revenues and earnings will likely trend for the quarter. So, what are some of the trends that are likely to drive Delta’s results?
Interestingly, DAL has had a Sharpe Ratio of 0.1 since early 2017, which is lower than 0.5 for the S&P 500 Index over the same period. This compares with the Sharpe of 1.2 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.
Delta will likely continue to benefit from the robust travel demand. It should see a continued rise in total available seat miles (ASM), and the passenger load factor will likely remain strong. However, it will be a tough comparison with the prior-year quarter, which saw a record travel demand. The average ticket price has also cooled this year while overall capacity has expanded. Looking at Q2 2023, Delta’s revenues of $14.4 billion were up 20%, led by a 17% rise in available seat miles (ASM) and a 3% rise in passenger revenue per available seat mile (PRASM).
Delta reported $2.68 earnings per share on an adjusted basis in Q2 compared to a $1.44 figure in the prior-year quarter. The company’s average fuel price per gallon stood at $2.52 in Q2, and it should be lower in Q3 vs. its prior-year figure of $3.53. The average U.S. Gulf Coast Kerosene Jet fuel price per gallon fell from $3.90 (end of June last year) to $2.25 in June 2023. However, fuel prices rebounded in recent months, and the jet fuel price has now risen to $3.07 per barrel. This will likely weigh on Delta’s operating margin in the near term. After seeing a sharp decline from 13% in 2019 to -91% in 2020 due to the impact of the pandemic, Delta’s operating margin has gradually recovered to 6% in 2022. Our Delta Operating Income Comparison dashboard has more details.
Looking at Delta’s stock price, we believe that it is undervalued. We estimate Delta’s valuation to be $56 per share, reflecting a significant 50% upside from the current levels. Our forecast is based on a 9x P/E multiple for DAL and expected earnings of $6.47 on a per-share and adjusted basis for the full year 2023. The company has guided for adjusted EPS to be in the range of $6.00 to $7.00 for 2023. However, given the surge in oil prices and challenging macroeconomic factors, it is likely that Delta may lower its guidance for 2023 or narrow it toward the lower end of the earlier provided range. We will update our model for Delta post the Q3 earnings release.
|S&P 500 Return||0%||12%||92%|
|Trefis Reinforced Value Portfolio||0%||23%||533%|
 Month-to-date and year-to-date as of 10/4/2023
 Cumulative total returns since the end of 2016
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