Shares of Delta Air Lines (NYSE: DAL) were down 5% as of 2:40 p.m. EST on Thursday, as investors reacted to an earnings warning announced at Delta’s investor day in New York.
In a press release preceding the actual conference, Delta revealed that it would be updating guidance today to reflect an expectation for $6 to $7 per share in net earnings next year.
Investors are dragging Delta down today, but Delta stock is priced to take off. Image source: Getty Images.
Delta spun this news as a positive, noting that $6 to $7 in earnings will represent double-digit earnings growth for the company, undergirded by top-line growth in 2019 of 4 to 6 percent and margin expansion.
Travelers should note that Delta also says it will be expanding its capacity, but only by 3%. Thus, to get to 4% to 6% revenue growth, it’s likely Delta will raise fares next year.
Problem is, analysts who follow Delta have been thinking the company would earn more along the lines of $6.70 per share. Taken at the midpoint, Delta’s new forecast implies an earnings miss of roughly $0.20 per share next year — which is why investors are selling. But is that the right call?
I’m not so sure. Even if $6.50 per share is below Wall Street’s forecast, at Delta’s current share price of $53 and change, it still works out to a P/E ratio of only 8.2 on the stock. That seems awfully cheap for a company promising to deliver double-digit earnings growth. (Going from an expected $5.58 per share in 2018 to $6.50 per share in 2019 would be 16% growth.)
At a PEG ratio of barely 0.5, some investors’ decision to sell Delta shares today may be exactly the wrong thing to do. It creates a buying opportunity for other investors who are better at math.
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