Once a company emerges from bankruptcy, it can be easy for investors to jump right on board, assuming that the company is immediately much better than it was before the bankruptcy and therefore it must be a good time to invest. But this is speculation, which Benjamin Graham encouraged Intelligent Investors to avoid. Intelligent Investors know that investment analysis requires a review of the financial statements to determine the company's risk level and intrinsic value. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method one can review a company's historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Delta Air Lines (DAL) fares in the ModernGraham valuation model.
DAL data by YCharts
Defensive Investor - must pass at least 6 of the following 7 tests: Score = 2/7
- Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
- Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
- Earnings Stability - positive earnings per share for at least 10 straight years - FAIL
- Dividend Record - has paid a dividend for at least 10 straight years - FAIL
- Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3-year averages at beginning and end of period - FAIL
- Moderate PEmg ratio - PEmg is less than 20 - PASS
- Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL
Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 2/5
- Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - FAIL
- Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - FAIL
- Earnings Stability - positive earnings per share for at least 5 years - FAIL
- Dividend Record - currently pays a dividend - PASS
- Earnings growth - EPSmg greater than 5 years ago - PASS
|Value Based on 3% Growth||$22.90|
|Value Based on 0% Growth||$13.42|
|Market Implied Growth Rate||5.67%|
Balance Sheet - 9/30/2013
Earnings Per Share
Earnings Per Share - ModernGraham
Delta Air Lines does not qualify for either the Defensive Investor or the Enterprising Investor. The company needs more time to demonstrate stable earnings and growth in the post-bankruptcy period. Though the company is showing some very encouraging signs of stability (four straight years of positive earnings), it will still take a couple more years before Intelligent Investors should be interested in the company as an investment. As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham's methods should seek out some other opportunities, such as through a review of 5 Undervalued Companies for the Enterprising Investor or 5 Outstanding Dow Components. From strictly a valuation perspective, the company does look undervalued; however, it is important to note that the results are affected by the massive write-offs the company recorded as it went through the bankruptcy process. EPSmg (normalized earnings) grew from -$17.13 in 2008 to $1.58 for 2013. This level of growth would more than support the market's implied growth estimate of 5.67%, and based on the demonstrated growth from the bankruptcy years to today, the ModernGraham valuation model returns an intrinsic value greater than the market price.
The next part of the analysis is up to individual investors, and requires discussion of the company's prospects. What do you think? What value would you put on Delta Air Lines Inc.? Where do you see the company going in the future? Is there a company you like better?
Disclosure: The author did not hold a position in Delta Air Lines Inc. (DAL) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.