Wall Street is sticking with Delta (DAL) stock, despite a lot of reasons to fly away from it.
BofA analyst Andrew Didora slashed his EPS estimates for the airline sector on Wednesday, citing jet fuel prices nearly doubling in March due to the Iran war.
“We see two scenarios emerging from the current situation: 1) fuel stays higher for longer which results in airlines with negative or low margins either shrinking meaningfully or considering alternatives or 2) a quicker than expected end to the conflict drives a robust earnings recovery. We assume the industry benefitting from the second scenario and airlines with good margins and strong balance sheets emerging stronger from the first scenario,” Didora said.
The analyst reiterated his Buy rating on Delta, “given DAL’s premium and corporate exposure, and free cash flow generation.”
Deutsche Bank analyst Michael Linenberg put Delta on his “fresh money” stock buy list today in a note.
“We think Delta is best positioned to navigate through a higher fuel price environment given its diversified revenue streams (e.g., refinery, loyalty program, cargo, corporate, premium leisure, long-haul international, etc.) and investment-grade rated balance sheet,” Linenberg said.
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Yahoo Finance data shows that of the 26 sell-side analysts that cover Delta, 25 rate the stock a Buy or Strong Buy. This is the most bullish analyst Buy-rating ratio among the major airline stocks.
Delta is the first airline to report earnings on April 8. The report will give a great early glimpse into how heavy industrials are navigating a more uncertain backdrop for demand and costs.
One couldn’t be faulted for staying clear of airline stocks heading into reporting season.
Since the start of Operation Epic Fury in late February, jet fuel prices have surged dramatically, creating one of the most acute cost shocks the airline industry has faced in years.
US jet fuel prices have spiked from about $2.50 per gallon before the conflict to around $4.50 to $4.60 per gallon. Global benchmarks have, in many cases, doubled amid supply disruptions tied to the Strait of Hormuz and instability in the Middle East.
This spike has sharply increased operating costs, with fuel representing up to 30% of airline expenses.
In response, airlines have moved quickly to protect profit margins by raising ticket prices and adding fuel surcharges, increasing ancillary fees like baggage charges, cutting flight capacity, and warning of potential cancellations if fuel shortages worsen.