Here’s Why Investors Should Hold Delta Stock (DAL) Now

Jhe increasing demand for air travel in the United States (particularly on the leisure front) bodes well for Delta Airlines DAL. However, escalating fuel costs are limiting earnings growth and appearing as a major downside.

Factors favoring OD

The gradual improvement in air travel demand in the United States is a huge boon for Delta, which currently holds a No. 3 (Hold) Zacks rank. Due to this tailwind, the carrier raised its revenue outlook for the second quarter of 2022. Delta expects June quarter adjusted total revenue to be fully restored to 2019 levels. until the same has recovered 93-97% of the 2019 level.

You can see the full list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The improvement in freight revenues (up 37% year-over-year in 2021) is also positive. In the first quarter of 2022, freight revenues jumped 51% to $289 million. This is the sixth consecutive quarter that cargo revenues have increased from comparable 2019 levels. Cargo revenues in the March quarter were boosted by strong demand and favorable yields. The cargo unit should continue to operate well until the end of 2022.

DAL’s good liquidity position is an additional asset. The airline ended the first quarter of 2022 with cash and cash equivalents of $9,955 million, well above the current debt of $1,116 million. This implies that DAL has sufficient liquidity to meet its current debt obligations.

Main risks

Escalating fuel costs pose a threat to Delta’s bottom line. The price of oil is moving north, mainly due to supply problems caused by Russia’s invasion of Ukraine. In the first quarter of 2022, the average fuel price per gallon (adjusted) increased 37% to $2.79. Management expects fuel prices per gallon to be between $3.60 and $3.70 in the June quarter.

Due to increased personnel costs and employee-related expenses, Delta’s non-fuel unit costs (up 11% in 2021) are increasing. In the first quarter of 2022, non-fuel unit costs were up 15% from first quarter 2019 levels. In the June quarter of this year, the metric is expected to be between 12.55 and 12.75 cents, compared 10.47 cents recorded in the comparable quarter of 2019.

Actions to Consider

Top-ranked stocks within the broader transportation sector include:

Golar LNG Limited GLNG currently has a Zacks rank #2 (buy). GLNG has a decent surprise history as its earnings beat the Zacks consensus estimate in three of the previous four quarters and missed the mark once, with the average surprise being 42.1%.

Shares of Golar LNG have risen more than 100% in one year. The strength of the LNG market boosted the stock. Rampant inflation has sent oil and natural gas prices soaring. Moreover, in the midst of the Russian-Ukrainian war, Europe is likely to seek gas supplies outside of Russia. This should boost demand for LNG vessels, which bodes well for GLNG.

South West Airlines LUV currently sports a No. 1 Zacks rank. The continued recovery in air travel demand bodes well for LUV. Anticipating a steady improvement in bookings, the carrier expects to turn a profit in the last three quarters of 2022 as well as for the full year. Management expects operating revenue to increase 12-15% in the second quarter of 2022 compared to the level of the comparable period in 2019. LUV sees strong bookings for spring and summer travel.

The positivity surrounding Southwest Airlines stock is evident from the Zacks consensus estimate for current-year earnings revised more than 100% higher in the past 60 days.

Ryder system R has a trailing four-quarter surprise of 48.2%, on average, as its earnings have exceeded Zacks’ consensus estimate over the past four quarters. R currently carries a Zacks rank of 2.

Favorable U.S. freight market conditions are driving growth for R. Ryder recently raised its guidance for the second quarter as well as the full year due to favorable pricing and strong rental vehicle sales and used.

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Delta Air Lines, Inc. (DAL): Free Inventory Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

James T. Quintero