Key points
- Delta Air Lines delivered a record quarter and is driving growth that could take the market to new highs.
- Cash flow is strong, allowing for debt reduction and return of capital as the company reinvests in the business.
- Analysts view the stock as a deep value and may raise their targets now that guidance is updated.
- 5 stocks we prefer to Delta Air Lines
Despite persistently high demand, rapid improvement in the domestic economy and record profits, Delta Airlines NYSE: FROM stocks struggled to gain ground. The company’s efforts are reducing debt and lowering its leverage ratio, and it is on track to regain investment-grade debt ratings. Cash flow is solid, the company expects another massive debt reduction this year, and there’s a dividend to consider.
The dividend was recently reinstated and is on track for aggressive increases in the coming years. Overall, this stock has everything it needs for its price to reach new highs, sustain them and reach new highs; the only question is whether the market will seize the opportunity.
Delta Posted a Record Quarter: Guides to Growth
Delta Air Lines reported an excellent quarter with strong demand in the travel, business and international segments. The company posted net sales of $13.75 billion, a gain of 7.8%, which beat the Marketbeat-reported consensus by nearly $1 billion, or 690 basis points. More importantly, the company’s business is normalizing along with the aggressive optimization of profit centers, significantly improving profits.
The company’s total cost per average seat-mile, or CASM, decreased by 5.7%. Non-fuel costs increased 1.6% to match forecasts, while fuel costs decreased 5.4%. Total revenue per seat-mile decreased -0.7%, but was offset by volume and cost efficiencies, resulting in a 0.1% increase in profits. The result is a 50 basis point improvement in operating margin to 5.1% and free cash flow of $1.4 billion after investments and profit sharing. Bottom line, adjusted EPS is nearly double last year at $0.45 and 20% higher than forecast.
The best news in the report is about cash flow and its impact on business health. The company reduced debt by another $1 billion in the first quarter and expects to reduce another $3 billion for the year. The company’s leverage ratio fell to 2.9X and supports a change in rating quality.
Fitch and Moody’s affirmed their high B rating and upgraded the outlook to positive, citing debt reduction and cash flow expectations. As for cash flow, the company’s guidance calls for mid-to-high single-digit growth in the first quarter and full-year earnings in a range with the midpoint above consensus.
Delta Air Lines is undervalued in many ways
Delta Air Lines is undervalued in many respects, including its price multiple and market outlook. The price multiple is in the single digits, about half of what should be considered cash flow, debt reduction, and the expectation that an investment-grade credit rating would follow. The catalyst for this scenario could be the dividend on track for aggressive increases. The company recently reinstated payment, but has yet to reach pre-pandemic payment levels, levels it will be able to match and sustain soon.
Analysts rate Delta a Buy and see it as a deep value. Even with the 5% increase in price action driven by first-quarter results, the market is still below analysts’ lowest target. The lower target implies another 1% upside and the consensus is about 15% higher. A move towards the consensus will be enough to take the market above critical resistance and could catalyze a technical rally.
Delta is at a critical inflection point
Delta Air Lines stock is at a critical inflection point and could rise. However, we have been here before and there is a risk that resistance limits gains at the $52 level or lower. In this scenario, the market may consolidate before moving higher or falling back into its trading range. If the market can sustain the upward movement now, set a new high and sustain it, the price of transportation stocks could rise until the end of the year.
Before you consider Delta Air Lines, you’ll want to hear this.
MarketBeat tracks daily Wall Street’s highest-rated and best-performing research analysts and the stocks they recommend to their clients. MarketBeat identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market takes hold… and Delta Air Lines wasn’t on the list.
While Delta Air Lines currently has a “buy” rating among analysts, top analysts believe these five stocks are better buys.
View the five stocks here
Are you trying to avoid the hassle of confusion, volatility and uncertainty? You would have to be out of business, which is not feasible. So where should investors put their money? Find out with this report.
Get this free report