The recent report and guidance from Delta Air Lines (NYSE: DAL) were slightly disappointing for more than one reason. However, they must be examined in the context of the stock's valuation and underlying earnings trends. In doing so, it's clear that there's a robust case for buying the stock despite its 22% run-up since the start of August. Here's the lowdown.

Delta Air Lines' mixed news

Starting with the negatives from the recent quarter and guidance, it's clear that Delta's revenue and earnings growth isn't quite going to be as strong as many would have hoped. For example, management started the year forecasting earnings per share (EPS) in the $6-$7 range. However, adjusted non-GAAP EPS was $4.31 in the first nine months and management's guidance for $1.60-$1.85 in the fourth quarter implies full-year EPS of $5.91-$6.16.

To be fair, the numbers show a negative impact of $0.45 from the CrowdStrike software update issue, which caused flight delays and cancellations in the summer. Still, even adding that figure back to the midpoint of the implied full-year guidance produces a full-year EPSs figure just shy of the midpoint of the $6-$7 range given at the start of the year.

Moreover, Delta's adjusted total revenue per available seat mile (TRASM) declined by 3.6% in the third quarter, while its non-fuel cost per available seat mile (CASM-Ex) increased by 5.7%. Even after adjusting for the CrowdStrike issue, the trend in the result is the same: TRASM down and CASM-Ex up. Delta could face margin pressure if this continues, and there's always the imponderable of fuel prices to factor in.

Furthermore, when discussing the fourth quarter, management spoke of a negative "one-point impact to system unit revenue for the quarter" due to the impact on domestic travel demand from the November election.

Putting it all together, you could look at the numbers and guidance and conclude that Delta's ticket pricing could come under pressure, leading to a shortfall in profitability. That's a concern at any time, particularly for a company holding $18.7 billion in adjusted net debt operating in a cyclical industry.

The bulls' case for Delta Air Lines stock

Delta's numbers and guidance could have been better, but they make a compelling case for buying the stock combined with management's commentary on industry trends. There are four reasons why.

First, regarding the quarter's year-over-year decline in TRASM (a closely watched industry measure), Delta's President Glen Hauenstein noted, "In the month of September, unit revenue inflected to positive in both domestic and transatlantic" and went on to add, "The improved unit revenue trends we saw in the month of September are continuing into the December quarter."

Second, as previously discussed, the airline industry appears to be much more disciplined in reducing capacity to match demand these days. Delta and United Airlines' management recently discussed an improving environment. Hauenstein confirmed this view by saying, "Domestic industry seat growth moderated significantly from the peak in June, with the industry now growing seats in line with demand."

Third, while Delta still has substantive debt, it generated $2.7 billion in free cash flow in the first nine months of 2024, and plans to repay $4 billion worth of debt this year -- part of the reason why Moody's and Fitch have given the airline an investment-grade debt rating.

Finally, Delta's premium cabin revenue growth continues to grow more than its main cabin revenue growth, and its remuneration from co-branded American Express credit cards was up 6% in the quarter to $1.8 billion.

Delta Air Lines stock is a buy

Delta continues to look highly attractive despite trading at just 8.3 times Wall Street analysts' consensus for 2024 (a year negatively impacted by the CrowdStrike issue). While costs are increasing, its revenue trends improved throughout the quarter. It continues to improve the quality of its earnings by increasing its premium cabin and loyalty revenue while growing its remuneration from its customers using its co-branded credit cards.

It makes the stock a buy for investors looking for airline exposure.

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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CrowdStrike. The Motley Fool recommends Delta Air Lines. The Motley Fool has a disclosure policy.

Delta Disappoints: Here's Why the Stock Is Still a Buy was originally published by The Motley Fool