Will Delta Air Lines Surge Higher?

With shares of Delta Air Lines (NYSE:DAL) trading around $14, is DAL an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Delta Air Lines provides scheduled air transportation for passengers and cargo in the United States and internationally. Its route network is centered around a system of hub and international gateway airports. The company also provides aircraft maintenance, repair, and overhaul services for other aviation and airline customers, as well as offers staffing services, professional security and training services. As air transportation is becoming increasingly more popular, Delta Air Lines is poised to capitalize into the future.

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T = Technicals on the Stock Chart are Mixed

Delta Air Lines has been a stagnant stock over the last five years. The stock seems to be getting ready to break higher as it is penetrating the top end of its multi-year range. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Delta Air Lines is trading around its rising key averages which signal neutral to bullish price action in the near-term.

DAL

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Delta Air Lines options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Delta Air Lines Options

49.45%

96%

90%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

May Options

Average

Average

June Options

Average

Average

As of today, there is an average demand from call buyers or sellers and average demand from put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Delta Air Lines’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Delta Air Lines look like and more importantly, how did the markets like these numbers?

2012 Q4

2012 Q3

2012 Q2

2012 Q1

Earnings Growth (Y-O-Y)

-98.04%

89.23%

-186.96%

139.47%

Revenue Growth (Y-O-Y)

2.42%

1.09%

6.33%

8.60%

Earnings Reaction

-1.64%

-1.08%

1.5%

0%

Over the last four quarters, Delta Air Lines has seen increasing revenue and mixed earnings. From these figures, the markets have been expecting a little more from Delta Air Lines’s last four earnings announcements.

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P = Average Relative Performance Versus Peers and Sector

How has Delta Air Lines stock done relative to its peers, Southwest Airlines (NYSE:LUV), United Continental (NYSE:UAL), JetBlue (NASDAQ:JBLU), and sector?

Delta Air Lines

Southwest AIrlines

United Continental

JetBlue

Sector

Year-to-Date Return

21.1%

22.78%

23.65%

12.03%

16.58%

Delta Air Lines has been an average performer relative to its peers and sector, year-to-date.

Conclusion

Delta Air Lines provides services that are seeing increased demand as travel for work or leisure becomes more important. The stock has been in a range over the last five years but may be getting ready to power higher. Increasing revenues are supporting a move higher while earnings cloud the picture. Relative to its peers and sector, Delta Air Lines has been an average performer in the recently strong airline space. Look for Delta Air Lines to continue to OUTPERFORM.

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