I find Delta Air Lines Inc. (NYSE:DAL) stock to be an excellent combination of value and growth stock. Although DAL's stock has significantly outperformed the market this year and in 2013, in my opinion, it still has plenty of room to move up. Delta will continue to benefit from the improvement of air travel demand over the next years on recovering U.S. and global economies. DAL has compelling valuation metrics and strong earnings growth prospects. Furthermore, the company is generating strong free cash flows and returns value to its shareholders by stock buyback and dividend payments.
Delta Air Lines, the world's second largest passenger airline, provides scheduled air transportation for passengers and cargo worldwide. The company has a fleet of approximately 900 aircraft. As of January 21, 2014, Delta served 318 destinations worldwide in 59 countries. Delta Air Lines was founded in 1924 and is headquartered in Atlanta, Georgia.
The table below presents the valuation metrics of DAL, the data were taken from Yahoo Finance and finviz.com.
Delta's valuation metrics are excellent; the trailing P/E is exceptionally low at 2.99, and the Enterprise Value/EBITDA ratio is extremely low at 6.24. According to Yahoo Finance, DAL's next financial year forward P/E is very low at 9.94 and the average annual earnings growth estimates for the next 5 years is high at 11.35%; these give a very low PEG ratio of 0.81. The PEG Ratio - price/earnings to growth ratio is a widely used indicator of a stock's potential value. It is favored by many investors over the P/E ratio because it also accounts for growth. A lower PEG means that the stock is more undervalued.
Latest Quarter Results
On July 23, Delta Air Lines reported its second-quarter 2014 financial results, which were in line with expectations. The company reported second-quarter 2014 adjusted earnings of $1.04 per share, 5.1% up from the year-ago adjusted profit of 98 cents buoyed by operational efficiency as well as customer satisfaction. Revenues increased 9.4% year over year to $10.62 billion.
- Delta's pre-tax income for the June 2014 quarter was $1.4 billion, excluding special items, an increase of $593 million over the June 2013 quarter on a similar basis. Delta's net income for the June 2014 quarter was $889 million, or $1.04 per diluted share, and its operating margin was 15.1 percent, excluding special items.
- On a GAAP basis which includes special items, Delta's pre-tax income was $1.3 billion, operating margin was 14.9 percent and net income was $801 million, or $0.94 per diluted share.
- Results include $340 million in profit sharing expense in recognition of Delta employees' contributions toward achieving the company's financial goals.
- Delta generated over $2 billion of operating cash flow and $1.5 billion of free cash flow during the June 2014 quarter. As of mid-July, the company has used its strong cash generation in 2014 to reduce its adjusted net debt below $8 billion, contribute more than $900 million of funding to its defined benefit pension plans, and return $550 million to shareholders through dividends and share repurchases.
In the report, Delta chief executive officer Richard Anderson said:
Delta's performance this quarter, with 9 percent top line growth, more than 4 points of margin expansion and $1.5 billion of free cash flow, shows the financial strength and resilience of our company. We expect our September quarter performance will be even stronger, as we expand our operating margins to 15-17% and further improve our profitability.
Dividend and buyback program
The forward annual dividend yield is at 0.64%, and the payout ratio is only 1.9%.
Since the company generates lots of cash, and the payout ratio is extremely low, there is a good chance that the company will raise its dividend payment.
With its strong cash generation year to date, the company has returned $550 million to shareholders as of mid-July. Through its $0.06 per share quarterly dividend, the company paid $101 million to shareholders. In addition, the company repurchased 12.4 million shares at an average price of $36.33 for a total of $450 million. These repurchases represent $200 million under the May 2014 $2 billion authorization, in addition to completing the May 2013 $500 million authorization.
A comparison of key fundamental data between Delta and its main competitors is shown in the table below.
Delta has a much lower debt-to-equity ratio and a much lower trailing P/E than its competitors. However, it has lower earnings growth prospects and higher forward P/E.
According to Portfolio123's "Balanced4" powerful ranking system, DAL's stock is ranked first among all S&P 500 stocks. The "Balanced4" ranking system is quite complex, and it is taking into account many factors like; EPS consistency, technical analysis, valuation, profitability ratios and dividend information, as shown in the Portfolio123's chart below.
Back-testing over fifteen years has proved that this ranking system is very useful.
The charts below give some technical analysis information.
The DAL stock price is 0.46% below its 20-day simple moving average, 3.87% below its 50-day simple moving average and 13.19% above its 200-day simple moving average. That indicates a short-term downtrend and a long-term uptrend.
Chart: TradeStation Group, Inc.
The weekly MACD histogram, a particularly valuable indicator by technicians, is negative at -0.55 and descending, which is a bearish signal (a rising MACD histogram and crossing the zero line from below is considered an extremely bullish signal). The RSI oscillator is at 56.81 which do not indicate overbought or oversold conditions.
All analysts covering the stock recommend it (a rare situation), among the seventeen analysts, six rate it as a Strong Buy and eleven rate it as a Buy.
TipRanks is a website that ranks experts (analysts and bloggers) according to their performance. According to TipRanks, among the analysts covering DAL stock, there are only six analysts who have the four or five star rating, all of them recommend the stock.
Delta is generating strong operating and free cash flow. The company has succeeded to achieve an impressive cash flow growth in the last six years. Delta generated nearly $5 billion of operating cash flow and $2.1 billion of free cash flow in 2013. Delta generated $951 million of operating cash flow and $390 million of free cash flow in the March 2014 quarter. Moreover, the company generated $2.1 billion of operating cash flow and $1.5 billion of free cash flow during the June 2014 quarter. As of mid-July, the company has used its strong cash generation in 2014 to reduce its adjusted net debt below $8 billion.
The company also raised its outlook for the September quarter, expecting now an operating margin of between 15% to 17%, after achieving in the last quarter operating margin of 15.1%.
I find Delta's ability to grow its free cash flow very promising. This strong cash flow enabled the company to achieve more than $9 billion in net debt reduction since 2009. Delta ended the June quarter with $6.0 billion of unrestricted liquidity and adjusted net debt of $7.9 billion.
Source: Deutsche Bank Global Industrials and Basic Materials Conference
Delta's stock has significantly outperformed the market this year and in 2013. Since the start of the year, DAL stock has gained 36.4% while the S&P 500 index has risen 4.5%, and the Nasdaq Composite Index has increased 4.6%. Moreover, since the beginning of 2013 DAL stock has recorded an astounding gain of 215.6%, while the S&P 500 index has increased 35.4%, and the Nasdaq Composite Index has risen 44.7%. Nevertheless, considering its compelling valuation metrics and strong earnings growth prospects, the stock, in my opinion, is still cheap.
As the world's second largest passenger airline, Delta will benefit from the improvement of air travel demand over the next years on recovering U.S. and global economies. Delta has compelling valuation metrics and strong earnings growth prospects; its Enterprise Value/EBITDA ratio is extremely low at 6.24. Furthermore, DAL's stock is ranked first among all S&P 500 stocks, according to Portfolio123's "Balanced4" powerful ranking system. Delta has deployed its strong cash flows to drive value for owners by strengthening its balance sheet through debt and pension reductions while also returning a significant amount of cash back to shareholders. All these factors bring me to the conclusion that DAL stock still has plenty of room to move up.
Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in DAL over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.