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Top Trades for Mon, 08 Oct 2018 13:21 – DAL

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
Revenue $m 36,670 37,773 40,362 40,704 39,639 41,244 43,048 44,360 46,461 +2.4%
Operating Profit $m 2,057 3,400 1,938 7,802 6,952 6,114 5,553     +24.3%
Net Profit $m 1,009 10,540 659 4,526 4,373 3,577 3,322 3,923 4,485 +28.8%
EPS Reported $ 1.19 12.3 0.78 5.63 5.79 5.15 4.90     +34.1%
EPS Normalised $ 2.34 6.65 3.72 4.66 5.40 4.92 4.90 5.55 6.49 +16.0%
EPS Growth % +84.1 +184.2 -44.0 +25.2 +15.8 -8.9 -0.6 +12.8 +17.0  
PE Ratio x           10.7 10.8 9.49 8.12  
PEG 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.


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