/Delta%20Air%20Lines%2C%20Inc_%20billboard-by%20monticello%20via%20Shutterstock.jpg)
Barchart's Unusual Stock Options Activity Report shows that a large volume of out-of-the-money (OTM) Delta Air Lines (DAL) call options have traded. That is a bullish signal from investors ahead of its earnings release tomorrow morning.
DAL is at $50.29 in midday trading on July 9, well off its peak of $69.06 on Feb. 5. However, it's still up from the April 8 low of $35.88. It could have much further to go using its historical valuation parameters.
Q2 Earnings Release Expectations
Analysts expect to see lower Q2 revenue and slightly lower operating margins compared to last year. For example, Seeking Alpha states that the consensus is for $16.21 billion in revenue vs. last year's $16.658 billion in sales.
Moreover, last year Delta produced an operating margin of 14.7%, (i.e., operating income/revenue). That is lower than this management's guidance for the upcoming Q2. Last quarter, Delta said it expects an operating margin of between 11% to 14% for Q2.
This lower profitability outlook is already discounted in DAL stock. So, if its margins come in better than expected, DAL could have potential upside (and vice versa).
That could be why there is heavy trading volume in Delta call options today.
Unusual Call Options Volume
This can be seen in today's Barchart Unusual Stock Options Activity Report. It shows that over 5,100 call options have traded at the $55.00 strike price, over 9% above today's price for calls expiring in 23 days on Aug. 1.
This means that buyers of these calls expect to see DAL rise to $56.96 or higher (i.e., including the premium they paid), or +12.7% from today. They have slightly over 3 weeks for this to happen.
Moreover, it's also moderately bullish from a seller of these calls standpoint. They have received at least a 90-cent premium or a 1.78% yield on today's price (i.e., $0.90/$50.50 = 0.0178).
In other words, they are willing to sell their shares at $55.90 (i.e., selling covered calls at this out-of-the-money strike price). That could provide a +10.7% (including the premium received) gain for a 3-week obligation to sell at the $55.00 strike price.
And no wonder, as DAL stock could be undervalued from a statistical standpoint.
Target Prices
For example, analysts now expect earnings per share (EPS this quarter of $2.07, compared to $2.01 last year. And for the full year, analysts expect EPS of $5.38 this year and $6.69 next year.
That means over the next 12 months (NTM), Delta Air Lines is on run-rate EPS of just over $6.00 (i.e., $6.04 per share).
As a result, DAL stock is trading on a forward price/earnings (P/E) multiple of just 8.3x. That is well below its historical average forward P/E multiple.
For example, Seeking Alpha reports that its 5-year average has been 9.3x. However, Morningstar says it's been 8.14x. So, on average, if DAL were to trade at its historical average:
$6.04 NTM EPS x 8.72 = $52.67 per share target price
That is +4.7% higher than today's price. Moreover, using the Seeking Alpha multiple average, it could rise to $56.17 (i.e., 9.3x $6.04 EPS). That is +11.75% higher than today.
Analysts Agree DAL is Undervalued
Moreover, 24 analysts surveyed by Yahoo! Finance have an average price target of $58.69. That is +16.7% higher than today. Similarly, Barchart's mean survey price is $61.09, or +21.5% higher.
And AnaChart.com, which tracks recent analyst recommendations, shows that 16 analysts have an average price of $65.55. That is over 30% over today's price.
The bottom line here is that from a historical forward P/E multiple standpoint and using analysts' target prices, DAL stock looks cheap.
That could explain why investors are both buying out-of-the-money calls three weeks away in expiration and selling covered calls.
