Delta Air Lines stock is zigzagging on Friday, a day after the carrier reported higher third-quarter earnings than expected but issued forecasts that were less upbeat than anticipated. Argus believes investors are right to seek out greener pastures.
The back story. Delta has been one of the stronger-performing airlines this year—the group as a whole has lagged behind the broader market—but the stock took a hit from the earnings report. Its outlook added to concern that an economic downturn could crimp airline profits—not what investors wanted to hear.
The shares are up 6% year to date now, compared with a gain of more than 17% for the S&P 500.
What’s new. On Friday, Argus analyst John Staszak lowered his rating on Delta to Hold from Buy, writing that while the third quarter was a strong one for Delta, clouds are massing that could keep the shares in check.
“With consistently profitable operations, strong financials, rising dividends and ongoing share buybacks, Delta is among the best managed airlines,” he wrote. “However, facing prospects for rising costs (particularly health care and wages) and slowing revenue growth, we think better returns are available elsewhere.”
Looking ahead. Staszak is still bullish about Delta’s long-term prospects, citing its route network and global expansion, as well as factors that will benefit the whole industry such as moderate growth in capacity and rising demand for air travel around the world.
That said, Delta is likely to remain volatile, much like shares of its airline peers. Even after the post-earnings selloff, the stock looks fairly valued, Staszak said.
Investors that do want to have exposure to airlines should consider United Airlines Holdings (UAL), he said. Staszak rates United at Buy.
Delta’s fourth-quarter outlook wasn’t terrible, but it did call for costs to rise more quickly than some investors expected. That contrasts with a lower third-quarter cost outlook from Spirit Airlines (SAVE), and speaks to some investors’ fears that profits remain fragile, and could turn lower if the economy worsens.
Delta was up 0.1% to $53.13 in morning, following losses earlier.