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Bear of the Day: Delta Air Lines (DAL)

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Rising fuel costs have caused volatility throughout the airline industry recently, and one particularly worrisome stock is Delta Air Lines (DAL - Free Report) .

Shares of Delta have slumped over the past few months as fuel costs put pressures on its margins and earnings per share expectations. The company recently raised its fuel costs per gallon outlook, ushering in a number of negative earnings estimate revisions and earning the stock a Zacks Rank #5 (Strong Sell).

Rising oil prices are exactly the type of thing that trigger estimate revisions in the airline industry, and this helps show the power that recent revisions have in terms of signaling near-term business trends. In this case, negative revisions confirm harsh business conditions, which is not a good sign for the stock.

What’s interesting, however, is that Delta’s slumping earnings consensus has not yet had its full effect on the stock. Here’s a look at the stock’s price performance overlaid with its EPS consensus:

Movements in consensus EPS estimates have had a noticeable effect on DAL shares over the past year, but the most recent dip in the company’s 2018 and 2019 projections has not been completely realized by the stock just yet. This should cause hesitation as it could spell trouble once investors do catch on to Delta’s current challenges.

Meanwhile, Delta has faced additional headwinds that should cause concern. In May, capacity increased 3.5% year over year, outpacing traffic growth of 2.9%. This meant that load factor—the percentage of seats filled by passengers—declined in the month, just as it did in April.

Delta’s load factor has decreased about 10 basis points on a year-to-date basis. This underscores a concern about capacity-related troubles that extend beyond industry trends.

Investors might note that Delta is now trading at just 9.3x forward 12-month earnings, which is a slight discount “Transportation – Airline” industry average of 11.9x. But we must remember that this discount is buying a sluggish stock with a concerning earnings outlook several headwinds of its own.

It feels like now is the time to sit on the sidelines and wait for Delta to make a noticeable rebound. This is obviously an iconic brand in the industry, so hopefully it will not be too long.

Want more market analysis from this author? Make sure to follow @Ryan_McQueeney on Twitter!

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