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Bull Of The Day: Delta Air Lines (DAL)

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Delta Air Lines (DAL - Free Report) , the largest airline in the US by market cap and sales, has taken off over the 6 past months with the stock surging over 30%, far outperforming the airline sector which has only seen 9% growth. DAL has beaten earnings estimates for the last 8 quarters in a row with its most recent report earlier this month illustrating not only Delta’s strongest sales but the most profitable quarter since the firm’s inception. Sell-side analysts have been increasingly bullish on DAL, raising their EPS estimates since the robust Q2 financial report earlier this month, pushing this stock into a Zacks Rank #1 (Strong Buy).

Delta Air Lines serves almost 200 million people in over 50 countries with more than 300 destinations that flyers can choose from.

The outlook for DAL is healthy, as the firm generates stronger year-over-year revenue per seat mile (RASM) for the past 9 quarters, propelling its revenues and profits to all-time highs. Q2 net income grew roughly 40% from the same quarter last year, and 2019’s total EPS is expected to appreciate over 24% compared to 2018.

The Boeing 737 MAX grounding was one the best things that could have happened to Delta this year with not a single Boeing MAX in their fleet. The capacity of the entire airline industry was reduced with Delta’s capacity being unchanged. The decreased airplane supply has driven up RASM with bullish expectations moving forward.

Delta hit its highest domestic load factor on record in Q2 with 89% of their total capacity being utilized. The MAX grounding played a role in this, allowing Delta to not only drive higher volume but do so at a larger marginal revenue. This capacity advantage is expected to improve Delta’s financials for the remainder of the year and should spill over to 2020.

Delta has been further investing in their premium products segment, which includes Delta Premium Select and Delta Comfort+, reflecting growth of 10% and 7% capacity expansion for this segment. The multi-year investment is expected to be a driving factor in Delta’s topline moving forward.

Valuation

DAL is trading at $61.54, right off of its all-time high of $63.27. The stock is being valued at an 8.44x forward P/E, right in the middle of its 5.20x - 11.7x 5-year range. DAL is currently valued below the airline sector’s average forward P/E of 9.1x. I believe that this is a reasonable valuation considering the growth factors I described above.

DAL’s 31.7x ROE is above top competitors like American Airlines (AAL - Free Report) , United Airlines (UAL - Free Report) , and Southwest Airlines (LUV - Free Report) .

Delta Air Lines yields its shareholders the best dividend in the sector at 2.6%. This dividend is expected to grow more than 37% over the next 3 years. A dividend exceeding the 10-year US Treasury yield is a reassuring payout on a stock that has shown consistent top and bottom-line growth and is trading at a forward P/E discount to the industry.

Take Away

Delta Airlines is considered by many Americans to be not only the largest airline but the best airline to fly. They have one of the lowest cancelation rates/delays, with 92.6% of its planes arriving on time. Delta operates the most lounges and cities served with an emphasis on expanding their large city presence.

There are risks involved in DAL, which include volatile gas prices that have a significant impact on variable costs. DAL is also exposed to economic risk; less people will flying if the economic outlook is grim. Consider these risks before putting on a position.

I believe that this stock has the potential to blow past its old highs in the coming weeks considering its upward momentum in 2019 thus far. The hefty 2.64% dividend yield that DAL is boasting is a comforting for any risk-averse investor, especially as interest rates fall to their lowest level since 2016.

 

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