When it comes to Delta air lines, Inc. (NYSE:dal), there are two key questions. The first is whether any shares of the airline, not only of dal shares, to invest. It is an industry, in the end, that fight wars dealfinder and bankruptcies, including Delta Chapter 11 filing in 2005. Second, whether the Delta margin is the best choice in the space, in contrast to rivals like southwest airlines co (USA:LUV) and United European company (Ticker NYSE:ual can).
At the moment, the answer to both questions is “Yes”. There are problems in the aviation industry, among them the rising price of fuel and risk the broader economy, it is near the top of the cycle. And there is a case to be made for peers, including Luv and international operators, such as Ryanair holdings PLC (ADR) (code Nasdaq:RYAAY) and China Eastern airlines Corp. Ltd. (ADR) (TICKER NYSE:CEA).
But Delta, the stock looks awfully cheap — and, it seems that the industry finally got its act together. With demand for travel is constantly increasing and in the short term is strong, there are good reasons for buying dal stock at these levels.
Case bear for dal stock
As the old saw goes, “focus on the downside and the upside take care of itself.” And DAL, as in any airlines, it is worth bearing in mind that drawback can be substantial.
After all, this is an industry that has been a graveyard for shareholder value. Delta, United, and American airlines group Inc (Nasdaq:Neo) all went bankrupt in this age. Online travel Agency booking holdings Inc. (Nasdaq:BKNG) and budget group Inc (indexP) has led consumers to focus almost exclusively on price — and admitted that prices are public and easy to compare. Frequent flyer programs aside, there is little in the way of “moat” or competitive advantage among the major airlines.
No less than Warren Buffett stated that “if a farsighted capitalist had been present at kitty hawk, he would have done his successors a huge favor by shooting Orville down.” Over time, airlines trying to fight for profit rather than focusing on profit. And so, while the distance the stock has risen over the past decade, 531% and 265% over the past five years, the obvious risk is that it’s all come to an end as soon as the industry loses its discipline.
Still in the industry was reasonable, when it comes to possibilities. But the obvious question is: What happens when the economy turns. Delta bought 100 aircraft Airbus GRP/ADR (OTCMKTS:EADSY) in December. These aircraft will be delivered in 2020. But if Delta has more power, and the economy has turned South, the company is not tempted to reduce prices in order to attract business and tourists? And if competitors will follow them, will be serious lessons from the last century, commercial flight again?
The bull Case for dal stock
But after the last few years, it seems as if the airline industry finally learned this lesson. Capacity is growing, I must admit. Itself Delta predicts a 3-4% growth in 2018.
That, however, manageable level. This is enough to maintain price discipline in place. Indeed, it is enough to make Buffett himself, to buy shares of the airline — including Dahl.
Is long-term fair wind (no pun intended) for the industry. People around the world farther and more often. Young people the priority of experience over “stuff”. Economic cycles aside, the long-term trend in travel demand appears to be moving in the right direction for airlines.
And yet, the Delta warehouse is not pricing in any growth. In fact, it is priced as if it is near a cyclical peak. OOO trading at 8.2 x the management of EPS in 2018. These are the few that suggests profit will decline over time. In addition, it is one of the cheapest valuation in the industry. Wow deals on 9x 2018 consensus. Luv it on 11X. Only AAL is in the same range — and it has a much more leveraged balance sheet.
It’s not hard to see the distance moving, at least double-digit EPS several. Indeed, the average analyst price target implies approximately 11X multiple, at a price of $73 32% growth potential. This is one of the biggest gaps in the S&P 500, and the rate gap between sentiment and fundamental value of the Delta shares.
If the gap is narrow, it seems that dal will see solid pros. Admittedly, that requires the Economy and the industry, to cooperate. At the moment it seems the likely outcome — and to move higher in the Delta warehouse.
At the time of this writing, Vince Martin has no positions in any securities.