How to Read Delta Air Lines' Excellent Q1 Results

The world's second-largest passenger airline reported its first-quarter earnings before the market opened Wednesday, and there was plenty about them to like, including its best-ever top-line result. That had been telegraphed a bit when Delta Air Lines (NYSE: DAL) raised its guidance recently, but Wall Street still applauded by pushing the stock upward for the day.

In this segment from MarketFoolery, host Chris Hill and analyst Emily Flippen discuss Delta's gains relative to the state of the broader economy, how oil prices factored in, its insulation from Boeing's 737 MAX troubles, and how the stock looks now.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

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This video was recorded on April 10, 2019.

Chris Hill: Let's start with Delta, though. Delta Air Lines reported record revenue in the first quarter. Strong profits. They look like they're doing a good job on holding the line on expenses. You tell me, was there anything of note to be worried about with Delta? This looked like a really strong report.

Emily Flippen: Yeah, great report from Delta. Not completely unexpected, because last week they did raise revenue guidance, citing healthy demand. The company beat on both revenue and earnings, actually recognizing record-high revenue at $10.4 billion. But, that's still only about a 7.5% increase year over year, which is small, I think, for the economy that we're in right now, but significant for the airline industry as a whole. Delta shareholders are definitely happy today.

There are a few things of note to me. The first was that part of their improved guidance was because oil prices weren't as high as they were expecting, which is really saying something. Oil prices have definitely shot up. It makes you wonder what Delta management was expecting here.

Hill: Yeah, I saw that too. I had the exact same reaction. It was like, "Wait, how high were you expecting oil to go, that this is lower than what you were expecting?" But, look, if they're being super conservative in terms of that what they think the price of oil is going to be, good for them. Again, they're doing a good job holding the line on expenses. That's obviously a huge expense for any airline.

Flippen: It is. They also didn't have any of the 737 MAX planes. A lot of that controversy that we saw earlier this quarter that affected a lot of other airlines, including American Airlines, Delta was relatively shielded from that. I don't think it makes a material difference, really, over the long term. But it's definitely helped over the short term.

Hill: Yeah. I think we mentioned this on a previous episode, we always have expectations when we go into earnings season. Some of them have to do with the macroeconomic environment. Some of them are industry-specific. I think we said a couple of weeks ago on this show, expect absolutely every airline reporting earnings to either proactively talk about Boeing or immediately be asked on the conference call about Boeing.

Flippen: Oh, of course. And I'll tell you what, it will be interesting to see if this changes the Buffett view about Delta at all. There's been a lot of word about whether or not Delta would be the next Buffett acquisition, a lot of controversy around that potential. It's a cyclical industry, but Delta is doing well. It's definitely one of the better-managed airlines. I'm interested to see if we see any Buffett buying in the future.

Hill: We have one other airline to get to. But really quick, when you look at Delta's stock, it's not moving a whole lot today, but as you said, they had recently raised guidance. Year to date, it's up 15%. It's had a pretty decent lift recently. Does it look expensive to you?

Flippen: It doesn't look expensive to me for the reports that we're seeing today. What does worry me is, like I mentioned before, this is a cyclical business. When times are good, times are good. But when times are bad, times are bad. The price that investors are willing to pay today is probably higher than the price that they're going to pay when the economy starts to contract. And that's a when, not an if. The rising price of oil does have me a little bit concerned. Who knows how long that will last? And, a general economic pullback will definitely hurt companies like Delta.

Chris Hill has no position in any of the stocks mentioned. Emily Flippen has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Delta Air Lines. The Motley Fool has a disclosure policy.