Is Delta Air Lines Stock a Buy Before Friday's Earnings Report?

Earnings season is about to begin, and Delta Air Lines (NYSE: DAL) is one of the first big names up. The carrier reports second-quarter results Friday, July 10, before the market opens, among the earliest S&P 500 companies to do so. With the stock up about 35% this year as of this writing, is it worth buying ahead of the report?

Let's look at what Delta told investors last quarter, what it has guided for this one, and how the valuation stacks up.

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What Delta set up last quarter

When Delta reported March-quarter results in April, the headline was demand. Adjusted revenue rose 9.4% year over year to a record $14.2 billion for the period, and adjusted earnings per share came in at $0.64. Free cash flow was a healthy $1.2 billion. The company also kept paying down debt, trimming adjusted net debt to $13.5 billion, below where it stood in 2019.

More important for Friday is what management guided toward for the June quarter. Delta called for revenue up in the low teens year over year, an operating margin of 6% to 8%, and adjusted earnings per share of $1.00 to $1.50. It expects to lead the industry with about $1 billion in profit for the quarter.

CEO Ed Bastian struck a confident tone.

"In the June quarter, we expect to lead the industry with $1 billion of profit," he said in the company's March-quarter release. He added that while a recent fuel spike is pressuring earnings, "this environment ultimately reinforces Delta's leadership."

That last point is the swing factor. Delta's June-quarter guidance already bakes in higher fuel costs. It assumed all-in fuel of about $4.30 per gallon, and management responded by pulling back on capacity growth to protect margins. So the question Friday isn't just how strong demand was. It's whether Delta held its profit line against a costlier fuel backdrop.

It's also worth remembering how Delta makes its money. Beyond main-cabin ticket sales, the airline leans on a lucrative co-branded credit card program and a growing premium-cabin business. Those higher-margin revenue streams are a big reason Delta consistently out-earns the rest of the industry, and they're part of why management can guide to a $1 billion quarter even with fuel working against it.

Does the setup make the stock a buy?

Here's where valuation comes in, and it's the most compelling part of the story. At about $92 per share, Delta trades at roughly 13 times trailing earnings. That's well below the broader market's multiple of more than 20. Rival United Airlines is cheaper still, at about 12 times earnings. In other words, the market is pricing airlines like cyclical, low-quality businesses even as Delta generates industry-leading profits and real free cash flow.

That gap is the bull case. If Delta keeps producing $1 billion quarters and paying down debt, a low-teens earnings multiple looks too cheap for the strongest operator in the group. And the company has given itself levers to defend margins, from cutting capacity to recapturing fuel costs, instead of leaning on strong demand alone.

But should you buy specifically to catch Friday's report?

I'd be careful there. No one can know how a stock will react to a single earnings release, and buying just ahead of one is closer to a coin flip than an investment. Delta delivered last quarter's results within its own guidance despite a fuel spike, but a soft read on demand or an ugly fuel number could send shares lower regardless of how cheap they look.

Overall, I think Delta is an attractive stock at about 13 times earnings for investors willing to hold through the sector's cyclical swings. But the decision shouldn't hinge on Friday's report. Only consider the stock if you like the business and its valuation from a long-term perspective, because there's no way to know how the stock will react after the earnings report drops.

Daniel Sparks and his clients have no position in any of the stocks mentioned. The Motley Fool recommends Delta Air Lines. The Motley Fool has a disclosure policy.