Airline companies such as Delta Airlines (NYSE: DAL) have seen their demand, and as a result their stocks, fall drastically this year. In addition, their debt and leverage have gone up significantly. One could term buying Delta’s stock right now a slightly risky bet, but it could also result in upside for those willing to wait out the pandemic. Not convinced? Here is another reason. Delta was trading cheaply and was a good bet even before the pandemic hit. Its stock has only fallen since then, and it is only a matter of time before the demand rebounds completely. Our dashboard Delta Airlines Is Trading Cheaply briefly summarizes why Delta is a good buying opportunity. To cut a long story short, despite showing consistent growth and relatively higher profitability compared to its peers, the stock has been trading at a lower multiple. The market simply needs to recognize this mis-pricing.
So why do we say Delta is trading cheaply? There are 3 reasons. First, At the end of 2019, Delta’s stock was trading at $58, which is twice the figure that it is trading at now (as of Aug 18, 2020). That’s 50% lower right there despite the fact that air travel is an essential service that is likely to rebound fully once the pandemic impact wanes. Second, at the end of 2019, Delta’s stock price implied a trailing EV/EBITDA multiple of 5.2, which was almost 10% lower than a year before. Compared to Delta, its peers AAL, LUV, and UAL were trading at a significantly higher multiples of 6.6, 7.5, and 6.1 respectively. If we take profitable players and look at EV/EBITDA of the entire industry, we find Delta again lagging behind – 5.2 for Delta vs 6.54 for the industry. Third, this lower multiple is despite consistent growth (~ 19% in the last 3 years) and relatively higher operating margins. Delta’s operating margin in 2019 stood at 13.4% vs just 6.9% for Alaska, 6.7% for American, 12.8% for Southwes,t and 8.8% for United.
Considering the above, we think that as demand rebounds, Delta is likely to give good returns to investors.
So, Delta Airlines might give good returns from current levels. But, what if you’re looking for a more balanced portfolio instead? Here’s a top quality portfolio to outperform the market, with 170% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk. It has outperformed the broader market year after year, consistently.
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