Will Delta Reach New Heights?

With shares of Delta Air Lines Inc. (NYSE:DAL) trading at around $17.49, 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 was given an OUTPERFORM rating here on March 5, but have circumstances changed?

Delta serves over 160 million customers per year. Despite that fact, the competition is always fierce. And fuel costs are an even bigger concern (has been approximately 37 percent of costs). However, as we all know by now, Delta made an unprecedented move by buying its own oil refinery. This was a risky move, but if it works out, then it’s going to be a home run.

Customer satisfaction has also been a focus for Delta. The airline has done everything in its power to make passenger experiences more comfortable and enjoyable. And Delta still isn’t done. It’s constantly attempting to find creative ways to improve passenger experience. Passengers might not be happy about the increase in lounge membership, but investors won’t mind.

Delta and debt have gone hand-in-hand for many years. While this is still a concern, Delta has been focused on debt reduction. This will be covered further on the next page.

Other positives for Delta include capacity discipline and better resiliency than most peers in past bear markets. However, it’s not resilient. Airlines as a whole don’t hold up well when market conditions worsen.

The company culture at Delta is strong. At Glassdoor.com, employees have rated it a 3.3 of 5, which is high for the airline industry and above average in general. A respectable 65 percent of employees would recommend the company to a friend, and a somewhat impressive 74 percent of employees approve of CEO Richard H. Anderson. For a comparison, employees at US Airways Group (NYSE:LCC) have rated its employer at 2.9 of 5. An average 50 percent of employees would recommend the company to a friend, and 69 percent approve of CEO Doug Parker. For one more comparison, employees at United Continental Holdings (NYSE:UAL) have rated its employer at 2.9 of 5. An unimpressive 41 percent of employees would recommend the company to a friend. However, 72 percent of employees approve of CEO Jeffrey A. Smisek. There’s a disconnect at United somewhere, but that’s a story for another time.

Now let’s take a look at some comparative numbers. The chart below compares fundamentals for Delta, US Airways, and United. Delta has a market cap of $14.62 billion, US Airways has a market cap of $2.76 billion, and United has a market cap of $10.85 billion.

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DAL

LCC

UAL

Trailing   P/E

16.45

5.20

N/A

Forward   P/E

5.51

5.50

6.55

Profit   Margin

2.43%

4.54%

-1.86%

ROE

N/A

121.61%

N/A

Operating   Cash Flow

$2.65 Billion

$1.00 Billion

 N/A

Dividend   Yield

N/A

N/A

N/A

Short   Position

0.90%

32.20%

7.80%

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

E = Equity to Debt Ratio Is Not Available  

The debt-to-equity ratio for Delta is unavailable. However, as far as the balance sheet is concerned, cash has been increased from $3.37 billion to $3.60 billion, and long-term debt has been decreased from $13.24 billion to $12.99 billion.

Debt-To-Equity

Cash

Long-Term Debt

DAL

N/A

$3.60 Billion

$12.99 Billion

LCC

5.82

$2.53 Billion

$4.89 Billion

UAL

27.37

$6.54 Billion

$13.17 Billion

 

T = Technicals Are Strong    

Delta has outperformed US Airways and United year-to-date.

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1 Month

Year-To-Date

1 Year

3 Year

DAL

7.66%

47.39%

58.33%

44.83%

LCC

1.50%

25.33%

66.54%

139.30%

UAL

5.23%

39.39%

48.74%

50.90%

 

At $17.49, Delta is trading above all its averages.

50-Day   SMA

15.64

100-Day   SMA

14.29

200-Day   SMA

11.94

 

E = Earnings Have Steady                    

Earnings and revenue have both steadily improved on an annual basis.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

22.70

28.06

31.76

35.12

36.67

Diluted   EPS ($)

-19.08

-1.50

0.70

1.01

1.19

 

When we look at the last quarter on a year-over-year basis, we see an increase in revenue, but a decline in earnings.

3/2012

6/2012

9/2012

12/2012

3/2013

Revenue   ($)in   billions

8.41

9.73

9.92

8.60

8.50

Diluted   EPS ($)

0.15

-0.20

1.23

0.01

0.01

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

Oil has been dropping, which is good news for the airlines. However, demand for leisure travel isn’t likely to remain strong. The consumer has an uphill battle considering tax hikes, current unemployment and underemployment, many companies now cutting employees to improve their bottom lines, the possibility of entitlement cuts, and more. It should also be noted that consumers have $2.4 trillion in debt. That’s with a “T”.

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Conclusion

Delta was ahead of the curve by purchasing an oil refinery. Other positives for Delta include improve improvements in debt management, revenue and earnings improvements on an annual basis, and a strong company culture. The big concern is the consumer. While Wall Street is enjoying the best time of its life, the average Main Street individual is attempting to figure out a way to survive. The dilemma here is that over the long haul, Delta needs the Main Street consumer in order to thrive.

All factors considered, Delta is a WAIT AND SEE.

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Disclosure: All content posted represents my opinion and views and should never be considered professional advice. You should do your own research and consult with a professional financial advisor before making any investment decisions. I do not have a position in this stock. I am currently short technology, financials, the Russell 2000, and the euro.

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