Reviewing Delta Air Lines Stock as Jet Fuel Crisis Sees Some Relief

Delta Air Lines Stock Is Taking Off

On Wednesday morning, Delta Air Lines (DAL) released the firm's first quarter financial results.

For the period ended March 31, Delta posted an adjusted EPS of $0.64 (GAAP EPS: -$0.44) on revenue of $15.854 billion. That top-line number beat consensus by more than $1 billion and was good enough for year-over-year growth of 12.9%.

Then it gets funky. The adjusted bottom-line print beat Wall Street quite easily while the GAAP EPS number missed by a country mile.

The huge adjustments were made primarily for the purposes of mark to market valuations on investments and mark to market valuations of settlements and hedging activities. The adjustments made for hedging activities ($151 million) are understandable and make sense. The $550 million adjustment for changes in investment valuations? Yikes.

Keep In Mind...

Crude oil prices are contracting sharply on Wednesday morning in response to the announced ceasefire in the U.S./Iran war due to the expected re-opening of the Strait of Hormuz. WTI Crude is down 16%. Brent Crude is down 14%. Jet fuel prices, however, will not contract as quickly as crude prices have or even as quickly as gasoline prices will.

It could take months to replenish supplies of jet fuel as underlying tensions in the Middle East could slow the movement of "raw" crude towards the refineries required to produce what aircraft need. The price of jet fuel had roughly doubled to a peak of $4.88 per gallon by April 3 since the war began in late February. I see jet fuel trading at about $4.23 on Wednesday morning. That's 5% off of the peak, but not the contraction seen across other energy commodity markets.

Guidance

For the current quarter, revenue growth is expected to grow in the low teens in percentage terms. That is better than the 9.5% growth that Wall Street is looking for. However, for this quarter, the firm sees its adjusted EPS at $1.00 to $1.50, dragging the midpoint of that range well below the $1.45 that had been Wall Street consensus. That is one reason why the stock is struggling to hold the early ceasefire-inspired gains.

CEO Ed Bastian commented in the press release:

"In the June quarter, we expect to lead the industry with $1 billion of profit. And while the recent fuel spike is currently impacting earnings, I'm confident this environment ultimately reinforces Delta's leadership and accelerates long-term earnings power."

Fundamentals

For the period reported, Delta generated operating cash flow of $2.432 billion. Out of that came a net $1.204 billion in capex spending, and cash used for investing. This left free cash flow of $1.227 billion, down small from the same quarter one year earlier.

Glancing over at the balance sheet, Delta ended the quarter with a cash position of $5.053 billion and current assets of $13.663 billion. Current liabilities add up to an alarming $32.699 billion. Included in that are $3.088 billion in shorter-term debt, but also $15.752 billion in deferred revenue (which is not a true financial obligation). That puts the firm's headline current ratio at a dismal 0.42. Even adjusted for deferred revenue, the ratio rises only to 0.81. Still not good.

Total assets amount to $84.431 billion. Goodwill and other intangibles account for $18.6% of that total, which is acceptable. Total liabilities less equity comes to $64.055 billion including $11.076 billion in longer-term debt. This is not a great balance sheet by any stretch.

Opinion

Cash flows are fine. The balance sheet could use some help. The guidance is wonky. Of course, the airlines need this ceasefire to hold. All bets are off if the shooting ramps back up or if the Strait of Hormuz does not safely re-open.

DAL soared into the U.S. open on Wednesday. Now, it's giving a good portion of those gains back.

To be honest, I want no part of this rally. The company is not executing at that high of a level and is not really that confident going forward. If the shares continue to work their way in form Wednesday morning's apex, I could become interested if there were a test of the 50-day SMA.

Writing May 8 $66 puts for a rough $2 might seem more attractive to me at this time than laying out cash for equity.

At the time of publication, Guilfoyle had no positions in any securities mentioned.