Delta Air Lines Stock Looks Attractive After Strong Quarterly Business Results

This Wednesday.Delta Air Lines (Delta) Air Lines (New York Stock Exchange: DAL)Koon announced its first-quarter revenue and earnings results, which were as tough as possible compared to the same period last year. More encouragingly, management is optimistic about demand trends going into the summer.

Delta Air Lines' spring and summer travel seasons will culminate in strong customer demand, driven by "generational shifts and changing consumer preferences," explained Ed Bastian, Delta Air Lines' chief executive officer, on the company's fourth-quarter earnings call. Specifically, Delta is seeing a shift in consumer service and High Bird service, as well as accelerated growth in demand for business travel. Combined with these demand trends and the industry's growing focus on rates, Bastian believes "this is the most constructive backdrop I've seen in my airline career.

Impressive sales and earnings momentum

Delta Air Lines first quarter revenue increased 81 TP3T year-over-year to approximately $13.75 billion. Adjusted operating income increased 61 TP3T year-over-year to $12.6 billion. Operating income soared 451 TP3T year-over-year as the company continued to recover from a sales decline during the COVID pandemic in an extremely difficult year-ago period.

Good industry performance and momentum from highly profitable projects resulted in adjusted earnings per share of $0.45, exceeding the average analyst estimate of $0.36.

"In the month of March, we delivered strong earnings growth by delivering record revenues on the back of outstanding operational performance," commented Bastian in the company's first quarter financial results.

Looking ahead to the full year, Delta expects this trend to continue. Koon expects second-quarter revenue to grow 5% to 7%.

Premium" tail

The re-acceleration of business travel and the continued shift in consumer spending away from goods and services are only some of the reasons behind Delta's impressive momentum. It could be argued that Delta's secret sauce lies in its success with the high-spending "High B耑" customer.

The company's HB revenue margins are higher than other revenue streams, up 101 TP3T year-over-year in the quarter, with the key to this growth being the 121 TP3T year-over-year increase in loyalty program-related revenue and the increasing number of HB seats on the planes. Of course, the increase in high seat capacity leads to higher in-flight retail sales.

Bastian explained on the company's fourth-quarter earnings call that "diverse, high-margin revenue streams created 57% of total revenue" and "differentiated Delta and solidified its industry-leading financial performance."

Fortunately, Delta believes there is a long road ahead to continue to improve and grow its High-B耑 product. Koon said on the conference call that more information will be shared at the investor day in November.

Time to buy?

Delta's current share price is only 7 times the midpoint of Koon's 2025 EPS estimate, so it seems that the market is not giving enough credit to Delta's operational execution and the momentum of its High Bird customers.

If consumer spending continues to shift from goods to services, and if the company's premium ingredients continue to grow as much as management believes they will, then Delta's stock could be cheap today over the long term.

There are, however, significant risks associated with investing in airlines. First of all, their cost structure is highly dependent on commodity prices. In addition, the production capacity and quality control of the aircraft manufacturers will also have an impact on the cost structure and growth of the industry. Finally, the aviation industry is closely linked to the health of the economy. As a result, airline revenues may be severely impacted during an economic downturn. For these reasons, any investment in Delta Air Lines should represent a small percentage of the investor's overall portfolio.

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Daniel Sparks does not own any of the above stocks. His clients may own shares of the companies listed above. the Motley Fool recommends Delta Air Lines. the Motley Fool has a disclosure policy.

Delta Air Lines Shares Look Attractive After Strong Quarterly Sector Meter was originally published by The Motley Fool.