Option Trade 
Delta Air Lines, Inc. (NYSE:DAL) Calls 
Tuesday, October 13, 2015

**OPTION TRADE: Buy the DAL Jan 2016 50.000 call (DAL160115C00050000) at approximately $2.30. Place a pre-determined sell at $4.50.

Note: No protective stop losses added as yet -- but if you wish to do so make it $0.90.

by Ian Harvey

October 13, 2015


Delta Air Lines, Inc. (NYSE: DAL), which provides scheduled air transportation for passengers and cargo throughout the United States and around the world, will report its Q3 results before the market opens on October 14. Analysts forecast earnings of $1.70 per share on revenue of $11.08 billion. The stock is down 7.7% on the year.

Shares of Delta Air Lines are on the increase as falling crude prices help lift the airline sector. Declining crude prices have helped the companies in the sector reap record profits due to falling jet fuel costs.

Delta is likely to continue its path of solid margin expansion in the next few quarters. In addition to the ongoing impact of low fuel prices, Delta will also benefit from significant capacity cuts it is making on international routes to address the negative impact of the strong dollar.

Despite Delta's rising profitability, the stock continues to trade at a bargain valuation: about 10 times projected 2015 earnings and eight times projected 2016 earnings. Delta also sports a solid balance sheet that is just one notch from investment grade and it produces copious free cash flow: roughly $4 billion-$5 billion annually.

As long as Delta continues to make sensible moves to match capacity to demand and limit cost increases, it should be able to sustain today's high level of profitability. That's enough to justify a meaningfully higher stock price.

Technical Details

Delta Air Lines will start trade today at $48.49. Yesterday the company had a trading volume of 10,647,348 shares.

Delta Air Lines has a 12-month low of $30.43 and a 12-month high of $51.06.

The company’s 50 day moving average price is $45.60 and its 200-day moving average price is $44.44.

The firm has a market capitalization of $38.58 billion and a PE ratio of 21.45.


Previous Earnings

Delta Air Lines last issued its quarterly earnings results on Wednesday, July 15th. The company reported $1.27 EPS for the quarter, beating the Zacks’ consensus estimate of $1.21 by $0.06.

During the same period last year, the company posted $1.04 EPS. The firm had revenue of $10.71 billion for the quarter, compared to the consensus estimate of $10.64 billion. The business’s revenue was up .8% compared to the same quarter last year. On average, analysts forecast that Delta Air Lines will post $4.56 EPS for the current fiscal year.

Future Earnings

Back in July, Delta had projected that its Q2 unit revenue would decline 4.5%-6.5% year over year. However, it expected its operating margin to reach 19%-21%, up from 15.8% a year earlier. This margin expansion was to be driven by fuel savings, with Delta expecting to pay $1.90-$1.95 for jet fuel in Q3, compared to $2.90 in Q3 2014.

Delta's investor update last week improved on all three of these metrics. The company now expects its unit revenue to decline 4.5%-5.5% for the quarter -- thus cutting out the lower end of the original guidance range -- while its average fuel price is projected to be $1.80-$1.85. As a result, Delta now expects to report an operating margin of 20%-21%.

This level of profitability was virtually unheard of in the airline industry just a couple of years ago, even in the seasonally strong third quarter. Even this year, when airlines are benefiting from low fuel prices, Delta's 20%-21% operating margin should put it near the top of the pack among the major U.S. airlines.

Why Delta Airlines?

• DAL's revenue growth has slightly outpaced the industry average of 6.7%. Since the same quarter one year prior, revenues slightly increased by 0.8%. Growth in the company's revenue appears to have helped boost the earnings per share.

• 36.57% is the gross profit margin for Delta Air Lines Inc which is considered to be strong. It has increased from the same quarter the previous year. Along with this, the net profit margin of 13.86% is above that of the industry average.

• Net operating cash flow has increased to $2,745.00 million or 33.51% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of 13.54%.

• The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Airlines industry. The net income increased by 85.4% when compared to the same quarter one year prior, rising from $801.00 million to $1,485.00 million.

• The debt-to-equity ratio is somewhat low, currently at 0.97, and is less than that of the industry average, implying that there has been a relatively successful effort in the management of debt levels. Even though the company has a strong debt-to-equity ratio, the quick ratio of 0.34 is very weak and demonstrates a lack of ability to pay short-term obligations.

Analysts Opinions

Recently, TheStreet Ratings team rated Delta Air Lines Inc as a Buy with a ratings score of A+. TheStreet Ratings Team has this to say about their recommendation…..

“We rate Delta Air Lines Inc (DAL) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, expanding profit margins, good cash flow from operations, increase in net income and largely solid financial position with reasonable debt levels by most measures. We feel its strengths outweigh the fact that the company has had somewhat disappointing return on equity.”

The company has also been the subject of a number of other research reports:-

• Cowen and Company reaffirmed a “buy” rating on shares of Delta Air Lines in a research report on Sunday, October 4th.

• Goldman Sachs reiterated a “buy” rating and issued a $60.00 price objective on shares of Delta Air Lines in a research note on Friday, July 3rd.

• Credit Suisse raised their price target on shares of Delta Air Lines from $61.00 to $65.00 in a research note on Thursday, September 10th.

• Morgan Stanley started coverage on shares of Delta Air Lines in a research note on Tuesday, June 23rd. They issued an “overweight” rating and a $65.00 price objective for the company.

• Finally, Zacks raised shares of Delta Air Lines from a “hold” rating to a “buy” rating and set a $53.00 price target for the company in a report on Tuesday, September 15th.

Two investment analysts have rated the stock with a hold rating, fifteen have assigned a buy rating and one has given a strong buy rating to the company’s stock. The stock presently has an average rating of “Buy” and an average price target of $61.00.

Harvey’s Options Volatility Indicator


Delta just wrapped up the best quarter in its history. Furthermore, the company is almost certainly past the worst of its unit revenue declines. With the stock trading at a bargain valuation, this seem to be a great time for this option trade on Delta.

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

**OPTION TRADE: Buy the DAL Jan 2016 50.000 call (DAL160115C00050000) at approximately $2.30. Place a pre-determined sell at $4.50.

Note: No protective stop losses added as yet -- but if you wish to do so make it $0.90.

”Success is simple. Do what's right, the right way, at the right time.”

Option Tip for your Success!
Options traders are not successful because they win.
Options traders win because they are successful.

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