The third-quarter earnings season is about to begin this week, with Delta Air Lines (DAL) scheduled to report its Q3 results before the market opens this Thursday, Oct. 10. 

Valued at $31.9 billion by market cap, Delta Air Lines is the largest commercial airline company in the world, and market participants will closely watch its upcoming results. While the company is on track to report record sales in 2024, DAL stock still trades 22% below all-time highs. Delta’s lower profit margins and cash flows are major reasons for this underperformance. 

Delta stock was trading at all-time highs just before the COVID-19 pandemic. In 2019, it reported revenue of $43 billion, a gross margin of 28%, and an operating margin of 14%. Its free cash flow in 2019 totaled $3.48 billion. 

In the last 12 months, Delta’s revenue has risen to $50.9 billion, with a gross margin of 21.8% and an operating margin of 9.9%. Comparatively, its free cash flow has moved lower to $1.1 billion. Further, the company’s interest expenses in the last year have totaled $800 million, much higher than the $300 million in 2019. 

Let’s see what investors should expect from the airline giant in the September quarter.

Delta's Q3 Revenue is Forecast at $14.71 Billion

According to average consensus estimates, Delta Air Lines is forecast to report revenue of $14.71 billion and adjusted earnings of $1.51 per share in Q3 of 2024. In the year-ago quarter, Delta Air Lines reported revenue of $14.55 billion and earnings of $2.03 per share. So, while revenue growth is forecast at 1.1%, its adjusted earnings might narrow by 25.6% year over year in the September quarter. 

During its Q2 earnings call, Delta Air Lines forecast revenue to rise by 4% while the midpoint earnings forecast stood at $1.85 per share for Q3. However, in July, an IT outage tied to CrowdStrike (CRWD) and Microsoft (MSFT) disrupted the business operations of several companies across multiple sectors. In fact, Delta Air Lines was forced to cancel over 5,000 flights as it had to reset 40,000 servers manually. 

Delta Air Lines CEO Ed Bastian said the massive IT outage, which left thousands of customers stranded, will cost the company around $500 million. The $500 million figure includes lost revenue and compensation costs incurred over five days as the company processed “thousands” of reimbursement requests. 

DAL had forecast to expand its flying capacity by at least 5% year over year in Q3, which is lower than the 8% capacity expansion in Q2. Notably, Delta Air Lines had earlier forecast record revenue in Q3 due to booming summer demand, even as it discounted fares due to an oversupply of flights. Bastian emphasized that lower industry capacity in domestic markets will align with demand toward the end of the summer. 

Moreover, corporate travel continues to increase, as companies expect to grow or maintain corporate travel spending in the near term amid a strong job market and lower unemployment rates. In Q2, Delta’s higher-margin premium tickets rose by 10% to $5.6 billion, while coach ticket sales grew marginally to $6.7 billion. Delta also has a credit card deal with American Express (AXP) that brought in $1.9 billion in the June quarter, up 9% year over year. 

Is DAL Stock Undervalued?

Delta Air Lines is the most profitable carrier in the U.S., and a standout in the low-margin airline sector. It is fairly insulated from overcapacity concerns as it generates a sizeable amount of revenue from premium ticket sales and its lucrative AXP partnership. 

In 2024, Delta forecast earnings per share between $6 and $7 with free cash flow of $4 billion. So, priced at eight times forward earnings and eight times free cash flow, DAL stock is really cheap. 

Each of the 19 analysts tracking DAL stock has a “strong buy” rating. The average target price for Delta Air Lines stock is $60.78, indicating an upside potential of 19.9% from current levels.

Delta Air Lines has significantly underperformed the broader markets in the last five years. However, its industry-leading profit margins, diversified revenue streams, and cheap valuation make it a top choice for investors with a high risk appetite. 

• Nvidia Stock Is Still Cheap Based on Analysts' Targets - Short Put Plays Are Attractive
• Cincinnati Financial Earnings Preview: What to Expect
• Earnings Preview: What to Expect From International Paper's Report
• Shaquille O’Neal Has a Towering $500 Million Net Worth and Business Empire—But His Kids Won't Get a Dime