This Stock Might Start Flying Soon

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

Inconsistent profits, bankruptcies, and bumpy stock performances have spooked many investors from investing in airline stocks. However, recent performance, increased market stability, and bullish earning projections are making some investors revisit these stocks once again. Delta Air Lines (NYSE: DAL) is no exception. In fact, the stock seems poised to outperform this year, and could be a relative bargain at current prices.

Valuation ratios

Delta's current P/E is 12.09, about average for the industry. However, one discovers its real attractive ratios when factoring future earning estimates: Delta's stock has a forward P/E of just 4.70, one of the lowest in the industry. With regards to competitors, US Airways' (NYSE: LCC) forward P/E is also an attractive 5.21, but is actually higher than the stock's current P/E of 4.99. United Continental (NYSE: UAL) does not currently have a P/E (as recent earnings were negative), but the forward figure is also an attractive 5.99.

In general, forward P/E's in the industry are attractive, but Delta's 4.70 seems to be the lowest of the group. When factoring in growth, the stock also fares well: its PEG is an attractive 0.46. However, when it comes to PEG ratios, US Airways has a clear edge: with a PEG of only 0.08, it is the best in the industry. At any rate, Delta's stock appears to be undervalued when considering future earning estimates and growth prospects.

Analysts

Wall Street analysts are moderately bullish on the stock. It currently has an average recommendation of 1.80 (buy-overweight), the same as US Airways and significantly better than that of United Continental. Delta's stock has an average price target of $18, which implies that the stock has 25% upside potential (compared to US Airways' 24% and United's 3%). Most analyst reports this year have given Delta an 'overweight' recommendation, despite the stock's already having gone up more than 20% YTD.

<table> <tbody> <tr> <td> </td> <td><strong>P/E</strong></td> <td><strong>Fw P/E</strong></td> <td><strong>PEG</strong></td> <td><strong>P/B</strong></td> <td><strong>Avg Rec</strong></td> <td><strong>Avg PT (%implied upside)</strong></td> </tr> <tr> <td><strong>DAL</strong></td> <td>12.09</td> <td>4.70</td> <td>0.46</td> <td> </td> <td>1.80</td> <td>$18 (+25.01%)</td> </tr> <tr> <td><strong>LCC</strong></td> <td>4.99</td> <td>5.21</td> <td>0.08</td> <td>3.23</td> <td>1.80</td> <td>$19.55 (+24.36%)</td> </tr> <tr> <td><strong>UAL</strong></td> <td>-</td> <td>5.99</td> <td>-</td> <td>20.33</td> <td>2.60</td> <td>$30.92 (+3.17%)</td> </tr> <tr> <td><em>Edge</em></td> <td><em>LCC</em></td> <td><em>DAL</em></td> <td><em>LCC</em></td> <td><em>LCC</em></td> <td><em>Tie</em></td> <td><em>DAL</em></td> </tr> </tbody> </table>

Price movements

The stock has risen more than 55% since last September, although it has lost some ground since its mid-March highs. It is currently 16.6% off its 52-week low of $17.25, but more than 70% above its 52-week low of $8.42. Historically, the stock has had a roller-coaster-like performance: in 2007, it reached $21, but proceeded to plummet to the $4-range in 2008 and 2009. It recovered in 2010, but lost some ground in 2011, only to recover in 2012. Delta has been in a strong bullish phase for the last six months, outperforming the general market. However, on April 2, when the company slightly curbed its 1Q growth forecast, the stock dropped 7%. It has not yet recovered from this - probably excessive - reaction.

Looking ahead

Industry consolidation

After a turbulent era of mergers and bankruptcies it seems that airlines have entered an era of stability. The US Airways - American Airlines merger effectively reduces the number of competitors, which will likely push airfares up, thereby improving Delta's margins and increasing future profit.

Refinery

Delta was strongly criticized for having bought the Trainer crude oil refinery complex from ConocoPhillips, its strategy to address rising refining margins. It didn't work out well in 2012, as the refinery actually produced a $65 million loss. However, the company anticipates a turnaround in 2013, when the refinery should save the company $300 million in jet fuel. If the company is right, these savings will improve Delta's margins handsomely in 2013.

Fleet rationalization

Delta plans to eliminate around 200 fuel-inefficient 50-seat regional jets, replacing them with modern, efficient narrower-body airplanes that'll have First and Economy Comfort class seats. This should lower unit costs, reduce flight times and improve the company's revenue per seat mile.

Increased demand

Demand is expected to increase this year, both in the United States and around the world. Delta's purchase of a 49% stake in Virgin Atlantic should help increase Delta's presence in the market for international corporate flights.

The bottom line

The era of underperforming airline stocks might be over. For Delta, valuation ratios are attractive, analysts are bullish, and the company's strategic decisions, coupled with a general improvement in the industry, could drive earnings higher. Given that billionaires like George Soros increased their holdings of Delta last year, maybe it is now time for general investors to follow suit. Delta's April 2 drop has driven the stock to levels that might present an attractive entry point.


Alex Bastardas 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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