Massive Upside for This Airliner

Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The per capita income of US citizens is gradually rising, while the unemployment rate has declined for the third straight month. This hints towards rising disposable income in the economy. Additionally, the Fed’s decision to buy $85 billion worth of mortgages every month would further add liquidity into the economy that altogether will bolster both per capita and disposable income. In my opinion, this would jumpstart tourism leading to increased airline bookings. This presents a bullish picture for airline companies, and I believe Delta Airlines (NYSE: DAL) could be a value play. Here are a few reasons to support the claim.

Delta Airlines has a market capitalization of nearly $11 billion, but its adjusted net debt stands at a mammoth $11.9 billion.

Not impressive right?

That’s what makes it a value play.

The company repaid $270 million of its debt in the recent quarter and management aims to bring down its adjusted net debt to $10 billion by the end 2013. Management stated it would try to push its 2013 cash flows to around $2 billion, which seems reasonable since it Q3 operating cash flows alone stood at $545 million. This focus on debt repayment has already contributed to $60 million of savings in interest expenses YTD. The company also refinanced most of its debt this year and was able to achieve a net interest rate of 4.5% across its overall debt portfolio. Going by the debt repayment target of $1.9 billion in 2013, the company could experience up to $85.5 million of savings in net interest expenses.

Smart Management

The company has also been improvising its in-flight experience. According to a recent report, Delta Airlines is the world’s largest Wi-Fi equipped fleet. This move attracts the business traveler, who needs to be constantly in touch with their business operations. If people can’t use their cell phones, they could use Skype for their conversations. Additionally since these frequent flyers tend to prefer business class over economy class, this could very well translate into added revenues and profits for the airliner.

To further boost its revenues, Delta Airlines recently launched its “Lift” package and “Ascend” package. The former costs $34, and offers 1000 air miles along with priority boarding facilities, whereas the latter costs $19 and offers priority boarding along with 24 hour Wi-Fi pass.

Restructuring and Expansion

The company has been also restructuring its operations in order to cut its expenses and improve the overall flight utilization. In December, 85.4% flights arrived on time, and its completion factor stood at an impressive 99.7%. Management expects to cut costs on “maintenance and process driven technologies” with the financial benefits beginning to show up in the second half of 2013. In December alone, its revenues rose by 4% YoY.

Last month Delta Airlines acquired a 49% stake in Virgin Atlantic for $360 million. The London-New York route is the largest airline route and Delta had just 3 flights per day on this route. Management of both companies have agreed to have 9 flights per day on the route; this would greatly benefit both companies.

The Peer Group

According to recent releases, US Airways (NYSE: LCC) is looking to buy American Airlines and the latter is considered to have the rudest staff on-board. Analysts believe that the positive effects of the merger are already priced in the shares of US Airways. This means that if the merger goes through, its shares would offer limited upside, but if the merger hits a roadblock, we could be staring at a deep plunge in its market cap.

United Continental (NYSE: UAL) has been reporting good financial results, but its P/E of 29x and a PEG of 7.9x indicates that its shares are greatly overvalued. Shares of Delta Airlines, on the contrary, trade at much lower valuations, with its P/E of 7.73x and PEG ratio at 0.32x.

The Wrap Up

Rising crude prices is an industry wide issue and won’t hurt Delta Airlines alone. But despite that, the airliner looks attractive with solid financials and fundamentals. I strongly believe that Delta Airlines can comfortably reduce its net debt burden to $10 billion by the end of 2013 due to its already strong cash flows. Due to the recovering macroeconomic conditions, higher consumer spending in 2013 would further increase its cash flows. Analysts expect annual EPS growth to average around 24.5% for the next 5 years; this means that the stock could double in value in less than 3 years. In short, Delta Airlines gets a Foolish Buy rating.


PiyushArora has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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