2023-06-12 12:32:15 ET
Summary
- Delta Air Lines stock has a positive long-term outlook due to an attractive valuation and strong growth projections in air travel demand.
- The company's strong expected growth is being driven by increased consumer spending on experiences over material goods, which includes air travel.
- Delta's advantage of owning a refinery mitigates the risk of rising fuel costs.
Delta Air Lines ( DAL ) looks positive for the long term as the stock trades at an attractive valuation. The company is expected to grow earnings at a strong-above average pace, which is likely to catalyze the stock. Long-term projections are also positive for air travel. The stock hasn't fully recovered from the pre-pandemic highs, which I see as a buying opportunity.
Long-Term Air Travel Projections/Trends
According to the International Air Transport Association [IATA], passenger demand for air travel is expected to approximately double over the next 20 years. The IATA expects the amount of air travelers to grow from 4 billion in 2023 to 7.8 billion by 2036. This should provide a good long-term positive catalyst for Delta's growth.
Over the past few years, there has been a trend with consumers valuing experiences over material goods. This consumer mindset can be summed up as 'doing rather than having'. The doing part includes traveling to visit family/friends as well as traveling to vacation destinations. About 52% of Americans surveyed stated that they plan to travel for leisure purposes during 2023. Also, less than one quarter of Americans have upcoming business trips in 2023. These are likely to act as tailwinds for Delta as demand remains strong.
Delta Air Lines mentioned in their Q1 conference call that 2023 was off to a good start with strong advanced summer bookings. The strong quarter was evident in the 45% revenue increase for Q1 2023 over Q1 2022. Delta returned to profitability in 2022 and continued that into 2023 after pandemic-related losses in 2020 and 2021.
Delta generated $2 billion in free cash flow in Q1 and stated that the company is experiencing robust demand for travel for the summer months. Delta stated that consumer demand for travel is higher than pre-pandemic levels. Delta also stated that travel for small and medium businesses moved ahead of 2019 levels. Corporate travel showed steady progress and was led by international travel.
The visibility that Delta has for strong summer bookings has them confident in their projections for revenue growth of 15% to 20% and for EPS to come in at $5 to $6 per share for the full year. Current consensus estimates for EPS are $5.64 for 2023 which would be 76% higher than last year. The consensus estimates for EPS was upgraded by 6% over the past 3 months from the previous estimate of $5.31.
Attractive Valuation
Most airline stocks are trading with attractive valuations. That can be the result of the sensitivity of the industry to fuel costs and the negative impact from the pandemic, which significantly reduced the demand for travel. Delta is trading with a forward PE of 7 and a PEG ratio of 0.21. This is below the sector median forward PE of 16.9 and PEG of 1.63.
Delta's forward PE is based on the EPS estimate of $5.64 for 2023 and the PEG ratio is based on Delta's 3 to 5 year CAGR for EPS of 33.5%. Delta's high expected growth rate is being driven by increased consumer demand of spending on experiences which can be achieved through air travel.
Delta's low valuation along with the company's strong expected growth for multiple years should allow the stock to outperform over the next several years.
Technical Perspective
Delta Air Lines Stock Price, MACD, RSI Weekly Chart (tradingview.com)
I pulled up the weekly chart, which shows the stock rising off the low from June 2022. The MACD indicator in the middle recently made a bullish crossover, indicating that the stock's trend changed back to show positive momentum. The purple RSI line at the bottom is showing strength as it moved above 50 into the bullish zone.
Delta Air Lines Stock Price, MACD, RSI Daily Chart (tradingview.com)
I would like to point out that the stock is overbought on the daily chart above, with the RSI exceeding 70 to about 76. This might lead to a pullback in the short term. However, I would expect the stock to resume the new uptrend after a pullback.
Additional Highlights
Delta achieved a strong ROE of 41% over the past 12 months as the company returned to profitability. However, there is room for the company to improve the ROIC of 8.5% and the ROA of 2.6%. I would prefer to see Delta's ROIC and ROA also reach double-digits. Delta's high ROE can help drive earnings growth going forward.
Fitch rates Delta Air Lines with a credit rating of BB+, which shows a stable outlook. This stable outlook was upgraded from negative. The upgraded rating reflects Delta's improvements in profitability and cash flow. It also reflects a healthy supply/demand balance for 2023 and expected improvements in operating margins and free cash flow. Delta's efforts at network restoration (new & restored routes) are expected to drive these improvements.
The network restoration includes adding back routes that were halted during the pandemic (flights to Berlin, Edinburgh, Stuttgart, Dusseldorf, and Geneva). This also includes new routes to Auckland and Nice and more frequent flights to Paris. The network restoration will help drive revenue and earnings growth as increased capacity better meets travel demand.
One key advantage that Delta has over other airlines is that the company owns a refinery. Delta owns the refinery in Trainer, PA. Delta gets a benefit of about 20 cents per gallon of jet fuel from owning this refinery. This acts as a hedge for higher fuel prices.
Strong Buy Quant Ratings
Seeking Alpha Quant Ratings (seekingalpha.com)
The tables above show Delta's strong buy quant rating according to Seeking Alpha's rating system. The factor grades are what comprise the overall quant rating. Stocks that have a 'strong buy' quant rating tend to outperform the S&P 500 ( SPY ). All of the individual factor grades were covered in this article. Therefore, Delta's stock has a good chance to outperform given its strong buy quant rating.
Delta Air Lines Long-Term Outlook
The long-term positive outlook for air travel demand is likely to act as a tailwind for Delta's growth, which could last through the decade. The company is already experiencing demand returning to pre-pandemic levels. However, the stock price has not yet returned to pre-pandemic levels. As a result, the valuation remains attractive with future growth expectations high. This looks like a recipe for strong outperforming stock price appreciation.
Investors should be aware of the risks for the stock. This includes the potential for an economic slowdown or recession, which could reduce the demand for air travel. Another risk would be a spike in fuel prices, which could increase operating costs and narrow profit margins. Of course, Delta's refinery ownership mitigates the fuel risk to a certain degree.
Analysts have a one-year price target of about $50 for the stock. This would result in a gain of about 27% from the current price. That looks reasonable as the price target would take the PE up to 8.9 based on the expected EPS of $5.64 for 2023.
For further details see:
Delta Air Lines: Stock Likely To Rise From Strong Growth & Low Valuation