When I started planning out today’s article early last week, it was going to be a tongue-in-cheek jab at Delta Air Lines Inc. (NYSE: DAL).
You see, Delta just banned puppies and kittens from all flights.
My 9-year-old daughter was devastated. She has neither a puppy nor a kitten but lamented that if Santa brings her one for Christmas this year (he isn’t), she wouldn’t be able to take it on an airplane.
I was going to jokingly berate Delta for crushing the hopes and dreams of all little kids around the world, while ultimately agreeing that animals under four months old just shouldn’t fly. Unless they’re birds … but they don’t need to be on airplanes either.
It was a common-sense move for both Delta and baby animals. I had about a page of witty banter down before Delta stock entered a tailspin.
Surely it wasn’t the emotional support animal news.
Ultimately, the drop in Delta stock was the fallout from the company’s investor day. As of this writing, DAL stock was off nearly 5%. That’s a pretty sizeable move for a stock that is historically known for low volatility. The news must have been pretty devastating.
And that creates an interesting opportunity to consider adding Delta stock to your portfolio…
The Market Needs an Emotional Support Animal
For the record, the offending data point was Delta’s 2019 revenue guidance. The airline forecasts revenue growth in a range between 4% and 6%. That puts the midpoint at 5.5% growth, above current expectations for all of Delta’s major competitors except JetBlue and Southwest — both of which are smaller and nimbler.
But analysts have forecasted, on average, revenue growth of 5.6% for Delta in 2019. That extra 0.1% was all it took to send DAL stock crashing nearly 5%.
This is panic selling at its worst.
The market has grown so volatile that it’s not just tech and momentum stocks suffering. It’s blue chips such as Delta.
In short, the market could clearly use a puppy or kitten right now.
What’s more, I believe that Delta was being conservative in its guidance. The company is expanding on its idea of tiered seating. Right now, you have the options of first class, business class (what Delta calls Comfort+) and main cabin.
Obviously, the upper two tiers generate more revenue from addons, with main cabin filled with people just going from point “A” to point “B.”
Roughly 30% of Delta’s revenue came from these upper two tiers this past year — that’s up double from six years ago.
Delta is planning on rolling out five different cabin tiers next week, with all of its wide-body planes similarly equipped by 2021.
Delta’s business model is clear. It’s done scraping the bottom of the barrel for increased baggage check fees and is going straight for the premium dollar of value-added, high-margin addons.
Nobody likes paying an extra $25 to check bags, but they will happily fork over that same amount for movies, entertainment, drinks, comfort and similar extras.
Delta has hit the mark with this model, but since it’s in the early stages of implementation, I believe the company is being conservative with guidance.
I look for Delta to lift revenue projections as it rolls out this new tiered cabin model to the rest of its fleet.
Investing in Delta Stock
My initial outlook for DAL stock was to wait for a pullback to the $54 region. The shares had gotten a bit top heavy heading into December, riding a bullish sentiment boost from plunging fuel prices. Delta expects fuel costs to drop 30% next year, by the way.
That rally had taken DAL stock into resistance in the $60-$61 region. While the stock was not overbought, it was close enough that broad-market jitters could prompt some profit taking. Those jitters were laid bare amid Thursday’s panic selling.
The chart above is not my typical daily chart. It’s a weekly DAL chart with a 52-week (or one-year) simple moving average (SMA) and a 104-week (or two-year) SMA.
As you can see, DAL has respected both moving averages for the past two years. Right now, DAL is testing support at its 52-week trendline. Should that support fail, the 104-week lies near $51.
The overall picture is clear. Despite the added market volatility, DAL remains in a solid long-term uptrend. It should be a solid addition to your portfolio, given the strength of its move into premium tiered high-margin services. Where to buy DAL is up to your risk tolerance.
The shares are a buy right here in the $53-$54 range, as a rebound from this area over the short term is likely.
Those with a more conservative outlook, however, could see better pricing in the $51 area, especially if the market experiences another downdraft.
Until next time, good trading!
Assistant Managing Editor, Banyan Hill Publishing