DAL/Dave – Rising fuel prices, rising labor costs, backlash against fees and seat sizes – all headwinds for the airlines next year but DAL is a great operator at $36Bn ($52), dropping $3.6Bn to the bottom line even after paying normal amounts of taxes last year ($2.1Bn on $5.7Bn earned) so that's 10x earnings BUT it's the same $40Bn they grossed in 2014, when they only made $659M, so very wild swings in the bottom line over time but I'd consider 2014 more a one-time thing.
| Year End 31st Dec | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | TTM | 2018E | 2019E | CAGR / Avg | |
| $m | 36,670 | 37,773 | 40,362 | 40,704 | 39,639 | 41,244 | 43,048 | 44,360 | 46,461 | +2.4% | |
| $m | 2,057 | 3,400 | 1,938 | 7,802 | 6,952 | 6,114 | 5,553 | +24.3% | |||
| $m | 1,009 | 10,540 | 659 | 4,526 | 4,373 | 3,577 | 3,322 | 3,923 | 4,485 | +28.8% | |
| $ | 1.19 | 12.3 | 0.78 | 5.63 | 5.79 | 5.15 | 4.90 | +34.1% | |||
| $ | 2.34 | 6.65 | 3.72 | 4.66 | 5.40 | 4.92 | 4.90 | 5.55 | 6.49 | +16.0% | |
| % | +84.1 | +184.2 | -44.0 | +25.2 | +15.8 | -8.9 | -0.6 | +12.8 | +17.0 | ||
| x | 10.7 | 10.8 | 9.49 | 8.12 | |||||||
| x | 0.84 | 0.84 | 0.56 | 0.95 | |||||||
| Profitability | |||||||||||
So yes, I'd certainly buy them as a slow accumulator on this sell-off but keep in mind airlines can always drop 20% overnight if there's a crash or a strike and recessions just murder them so you never want to go overboard. Still, for the LTP, we can add:
- Sell 5 DAL 2021 $45 puts for $5 ($2,500)
- Buy 15 DAL 2021 $50 calls for $10.20 ($15,300)
- Sell 15 DAL 2021 $62.50 calls for $5 ($7,500)
That's net $5,300 on the $18,750 spread so there's $13,450 (253%) of upside potential at $62 and, ideally, once they are back over $55, we can sell 5 (1/3) the Jan $60s (now 0.60) for over $1, which would be $500 for 3 months and we have 8 more quarters to sell to collect up to $4,500 (85%) against the $5,300 outlay.
So, on a trade like this, we're limiting exposure with just 5 puts (keeping in mind we have $50,000+ allocation blocks) and let's say DAL drops 20% to $42.50: The Delta on the $50 calls is 0.60 so they would drop to $4.20 but the $40s have a delta of 0.76 and are now $15.30 so they would be $7.70 (ish) and we're roll $10 lower for net $3.50 and have 15 of the 2021 $40/62.50 spreads and then we'd sell 5 more of the March $50 calls (now $4.85 with a 0.60 delta) for about $1 (can't count on those deltas to hold up when things get cheap) and then our net would be $5,300 + $3,500 – $1,000 (from 2 short call sales) = $7,800 on the $33,750 spread that's still $3,750 in the money at $42.50 and we'd still be able to work that basis down another $3,500 over the next two years.
That's without even doubling down or doing anything fancy so, if we're not worried about a 20% drop – it's hard to see a reason not to pull the trigger on the trade after a nice 10% pullback.
