In This Article:
After its 71% increase over the last year, investors could be forgiven for wondering whether there's room for Delta Air Lines (NYSE: DAL) stock to run. I think the answer to that question is yes, and after a slew of analyst price target upgrades, it's clear that Wall Street analysts feel the same way. Here's why Delta Air Lines is an excellent stock for a long-term investor portfolio.
What the market is worried about with Delta Air Lines
It's not difficult to run a stock screener over the market and find low-valued stocks, and Delta certainly fits the criteria. For example, the stock is significantly undervalued based on its current and forecast earnings and cash.
The following table shows some commonly used valuation metrics. Delta Air Lines' valuation metrics look good, but that's only part of the story.
| Metric | 2024 | 2025 (Estimated) |
|---|---|---|
| Earnings per share | $6.16 | $7.63* |
| Price-to-earnings ratio | 10.7 | 8.7 |
| Free cash flow | $3.4 billion | $3.8 billion* |
| Price-to-free-cash-flow ratio | 12.4 | 11.1 |
Data source: Company presentations. *Wall Street consensus: Delta's management expects more than $4 billion in free cash flow in 2025.
There are a few reasons why the market is pricing Delta so cheaply:
-
The airline industry is traditionally seen as highly cyclical, with boom periods followed by bust periods as airlines stick to running unprofitable routes while waiting for another upturn and a return to ticket pricing power.
-
Airlines, including Delta, took on considerable debt during the pandemic's height, and the debt overhang could put pressure on their financial situation, given the slowdown in earnings.
Indeed, Delta Air Lines had total debt and finance lease obligations of $16.2 billion at the end of the fourth quarter. The market is worried about what will happen if the traditional bust follows the recovery boom that occurred after the end of lockdowns.
Why the market's fears are overblown
There are powerful reasons to believe that Delta is an outstanding value stock, and the valuation reflects overblown concerns.
First, the current trading momentum is excellent, with the more profitable corporate traveler returning, transatlantic travel coming back, and ongoing strength in its premium cabin offerings. Indeed, on the earnings call, CEO Ed Bastian said he expects revenue growth of 7% to 9% in the first quarter of 2025, with continuing acceleration in corporate and consumer travel demand as well as spending on co-branded credit cards.
Second, premium airlines are behaving with discipline and cutting unnecessary capacity, leading to a return of ticket pricing power. The disciplined behavior of the industry and Delta helped the airline return its adjusted total revenue per available seat mile (TRASM), a key airline metric, to growth, up 0.4% in Q4.