For this week’s issue, I’m going to dip into the mailbag. A few days ago, I received this email from a reader:
“As an employee of Delta Airlines, I would appreciate some comment on Delta’s stock. I think we are poised as ever for a great recovery.”
We’ve been writing about airline stocks a lot recently (I discussed U.S. Airways and Roy Ward discussed Alaska Air and SkyWest), but so far, Delta hasn’t come up. I decided to dig a little deeper and discovered Delta hasn’t been featured in any Cabot newsletters lately.
Delta is currently the world’s largest airline, but if the planned merger of UAL Corp. (parent company of United) and Continental goes through, that airline will become #1.
When I looked further into Delta (DAL), I found that the company reported its biggest quarterly profit in a decade in its the most recent fiscal report, out in July.
Delta reported net income of $467 million, or 55 cents per share, for the second quarter, versus a loss of $257 million, or 31 cents a share, in the year-ago period. And Delta’s overall revenue climbed 17%, to $8.2 billion.
The company also provided a positive forecast, with double-digit revenue gains predicted for the third quarter.
But …
Despite all that good news, Delta’s stock fell on huge volume the day earnings were reported. And fell again two days later on higher than normal volume.
Since then, the stock has stabilized somewhat, but it has been unable to recover to previous highs seen in the spring and early summer.
In fact, the drop surrounding earnings was part of a longer-term downtrend that’s been intact since the market soured earlier this summer.
U.S. Airways (LCC) also dipped with Delta in July, but took off like a rocket after it reported earnings a few days later. The stock has settled down with the market’s recent weakness, but is still rated Hold by Cabot Top Ten Weekly.
Airlines are still a difficult cyclical industry to invest in.
If you’re looking for a real growth-oriented investment in the travel sector, I recommend Home Inns & Hotel Management (HMIN), which is benefiting from the booming China travel market.
The stock has popped up in a number of Cabot’s newsletters, most recently in Cabot Top Ten Weekly where Editor Michael Cintolo wrote:
“This story couldn’t be simpler. Home Inns is the largest hotel chain in China, and it’s growing. In the second quarter, the company opened 36 hotels; to bring its total to 674 hotels in 126 cities in China. The average number of guest rooms per hotel was 116, and the hotels had an average occupancy rate of 96.4% in the quarter, up from 90.5% in the previous quarter. As the economic recovery progressed, management saw the opportunity to raise prices at mature locations, and the result was a knock-your-socks-off after-tax profit margin of 19.6%, far above anything seen in recent years. The company is virtually debt-free (unlike most U.S. hotel chains), and plans to stay that way as it grows, adding a total of roughly 200 hotels in 2010. We like it.
“HMIN came public in late 2006, topped at 50 soon after and then joined the broad market in a slide that ended at 7 in late 2008. Since then, the stock has been on the comeback trail. A week ago, it topped 44, and we think it looks attractive on the current pullback toward the 50-day moving average at 41.”
Click here to learn more about Home Inns and the other leading stocks featured in Cabot Top Ten Weekly.