Time to Buy Airline Stocks After Delta's Strong Q2 Report?

Kicking off the second quarter earnings season, Delta Air Lines DAL reported strong Q2 results before market hours on Thursday and further boosted investor sentiment after officially announcing a dividend increase.

Lifting many of its peers, DAL spiked more than +12% in this morning's trading session, with United UAL and American Airlines AAL stock joining in on the rally and up +10% and +8%, respectively.

Delta Beats Q2 Expectations

Reporting Q2 EPS of $2.10, Delta was able to exceed expectations of $2.04 by nearly 3% despite a decline from earnings of $2.36 a share in a tough-to-compete-against prior year quarter. This came on Q2 operating revenue of $16.64 billion, which also topped estimates by roughly 3% but slightly dipped from $16.65 billion a year ago.

Still, Delta’s Q2 report served as a bellwether for broader travel trends, with revenue from premium cabin sales rising 5% and loyalty program revenue spiking 8%. Furthermore, Delta received $2 billion in remuneration from its partnership with American Express AXP in which the financial services giant serves as the exclusive credit card issuer for Delta SkyMiles.

DAL Dividend Increase

Of course, another highlight of Delta’s Q2 report was that the company officially increased its quarterly dividend by more than 25% with the new payout set for roughly $0.19 per share from $0.15. The first payment of the boosted dividend will be on August 21 to shareholders on record by July 31.

Delta Reaffirms Full-Year Guidance

Reassuringly, to the notion that airline stocks may regain their mojo after a turbulent start to the year, Delta restored its full-year guidance as tariff concerns previously dampened cross-border travel demand.

Delta reinstated its guidance that called for fiscal 2025 EPS at $5.25-$6.25, coming in above the Zacks Consensus of $5.11. Additionally, Delta reaffirmed full-year free cash flow expectations of $3-$4 billion.

DAL Performance & Valuation Comparison

Following the sharp post-earnings rally, Delta stock is still down 7% year to date. In comparison, this has trailed the benchmark S&P 500’s +6% and the Zacks Transportation-Airline Market’s -3%, with United Airlines stock down 5% and American Airlines shares down a grizzly 26%.

However, over the last three years, DAL is still up a very impressive +95%. While this has trailed United Airlines’ staggering gains of more than +150%, Delta stock has impressively topped the broader market and most of its other industry peers, with American Airlines shares down 4% during this period.

Attractive to long-term investors is that most airline stocks trade at significant discounts to the benchmark’s 24.2X forward earnings multiple, with DAL at 9.9X and nicely beneath the industry average of 13.9X. Plus, many airline stocks trade under the optimum level of less than 2X forward sales compared to the S&P 500’s 5.4X, with DAL on par with the industry average at 0.5X.

Conclusion & Final Thoughts 

Producing double-digit operating margins of 12.6% during Q2 (GAAP), Delta has set the bar for the airline industry this earnings season. Notably, United Airlines will be reporting its quarterly results next Wednesday, July 16, and results from American Airlines roll out on Thursday, July 24.

One this is for sure, Thursday’s rally was very promising regarding airline stocks regaining their mojo, with DAL and UAL landing a Zacks Rank #3 (Hold) at the moment. That said, there could still be better buying opportunities ahead, and American Airlines stock unfortunately lands a Zacks Rank #4 (Sell) as FY25 and FY26 EPS estimates have continued to decline for AAL in the last week.

This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research