Will the Delta Air Lines Rally Continue?

With shares of Delta Air Lines Inc. (NYSE:DAL) trading at around $12.99, is DAL an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

delta planeDelta Air Lines has been on a tremendous run over the past couple of months. If you happened to buy in early December, then you’re ecstatic right now. Unfortunately, chances are good that you didn’t buy in early December. Therefore, the question is: can this rally continue?

The most important news to have come out of Delta in the past year is a 49 percent stake in Virgin Atlantic for $360 million. This will lead to more routes between the United States and the United Kingdom. Since Delta is unable to own a majority stake in an international company based overseas, this was the perfect solution to get more business out of London’s Heathrow Airport. In related news, Virgin Atlantic just hired Craig Kreeger as CEO. He was Senior Vice President at American Airlines (AAMRQ). There has been much celebration about this news, but Mr. Kreeger played a key role in a company that went bankrupt.

Save time and make money with our LOWEST ADVERTISED PRICE EVER to help you achieve your financial goals in 2013. This is a LIMITED TIME OFFER, so get your Stock Picker Newsletter now!

Delta’s reputation has improved in recent years. While Delta still comes in the middle of the pack for passenger complaints, Delta is near the top of the class when it comes to mishandled baggage and bumping. In other words, it’s not likely that you will have these issues while traveling with Delta.

There are several negatives for Delta, one of which is heavy insider selling in December. It’s possible this was due to fiscal cliff concerns, but the selling was significant and should be mentioned.

Let’s take a look at some important numbers for Delta so we can get a better read on the situation.

E = Equity to Debt Ratio Is Atrocious

The debt-to-equity ratio for Delta is a disaster. Delta has been working on this issue, but it’s not making much of an impact. Delta’s stock has plenty of upside potential, but it’s difficult to sleep comfortably at night when the company you invested has been addicted to debt. Eventually, the bill must come due. As you can see below, high debt-to-equity ratios are normal for the industry, but Delta takes it to another level.

Debt-To-Equity

Cash

Long-Term Debt

DAL

10.30

$3.63 Billion

$12.66 Billion

LCC

6.02

$2.44 Billion

$4.57 Billion

UAL

6.64

$6.76 Billion

$12.12 Billion

 

T = Technicals on the Stock Chart Are Strong

Delta has had a great performance over the past year. However, so has the majority of the industry. US Airways Group (NYSE:LCC) has enjoyed the biggest gains, and United Continental Holdings (NYSE:UAL) wasn’t far behind Delta.  

1 Month

Year-To-Date

1 Year

3 Year

DAL

28.49%

9.44%

56.13%

2.36%

LCC

16.21%

9.93%

165.00%

183.20%

UAL

25.11%

9.75%

40.91%

-0.74%

 

At $12.99, Delta is trading above all its averages.  

50-Day SMA

10.54

100-Day SMA

9.98

200-Day SMA

10.22

 

E = Earnings Have Been Strong

Earnings have been steadily increasing since 2008. This has the potential to be a great turnaround story. Then again, how many airlines have showed a sustainable and profitable business without any outside help? In the end, most of them fail. That’s why many people look at airlines as trades opposed to investments.

2007

2008

2009

2010

2011

Revenue ($)in billions

19.15

22.70

28.06

31.76

25.12

Diluted EPS ($)

5.42

-19.08

-1.50

0.70

1.01

 

When we look at last quarter on a YoY basis, we see an increase in revenue and earnings.  

9/2011

12/2012

3/2012

6/2012

9/2012

Revenue ($)in billions

9.82

8.40

8.41

9.73

9.92

Diluted EPS ($)

0.65

0.51

0.15

-0.20

1.23

 

T = Trends Support the Industry… For Now

If you look at the history of this industry, there have been many severe swings in confidence. This mostly relates to fluctuations in oil prices. For many years, everyone will love the airlines. After everyone realizes that the majority of these businesses are doomed to eventually fail, reality sets in and stock prices pull back. Let’s throw a few bankruptcies in there as well. However, while the mood is Pollyanna, there is nothing wrong with getting on board for a potentially profitable ride.

There are other positive trends for the industry right now, which include the fiscal cliff deal, the potential for a merger between US Airways and American Airlines, a moderate increase in boardings, an all-time high in airline safety, and a future 50 percent increase in Internet service speed thanks to new FCC rules.

Conclusion

Delta has been improving in many areas. There has been much cost cutting as well as plans to cut the weakest aircraft from the fleet. Margins are low, but cash flow is good, and the Forward P/E is 5.15. The value is appealing right now, and there might be more room for the stock to run. However, over the long haul, Delta will likely end up exactly where is started, which has happened time and time again over the past five years.

Delta is a WAIT AND SEE.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.