Value Expert Books a Flight on Delta

10/18/2018 5:00 am EST

Focus: TRANSPORTATION

Jason Clark

Contributing Editor, The Prudent Speculator

Delta Air Lines (DAL) earned $1.80 per share in Q3 2018, beating the analyst consensus estimate of $1.74. The airline generated revenue of $12.0 billion, matching the consensus, observes Jason Clark, value investing expert and contributing editor of The Prudent Speculator.

The shares jumped more than 3.5% on the announcement, despite a broadly dreadful market day, with investors enthused that the company offered an outlook that impressed.

Delta CEO Ed Bastian said, “Our EPS was up 16% over last year driven by strong revenue momentum, tax reform benefits and a 4%lower share count. Demand for Delta products has never been greater. Our revenues grew 8% to nearly $12 billion, a record level for the company and now we expect to achieve 8% top line growth for the full year."

With one quarter remaining, Delta expects to earn $5 billion of profit in 2018, roughly similar to last year, despite a $2 billion increase in fuel cost. DAL expects revenue to increase 8% y-o-y, with adjusted EPS in the $1.10 to $1.30 range and a small decline in CASM (cost per available seat-mile).

The airline has a terrific management team headed by an industry veteran and has lowered its debt load (nearly $19 billion of debt in 2009, $9.9 billion at the end of Q2 and $9.2 billion at the end of Q3), while the extended low-interest-rate environment allowed Delta to pick up less expensive new (A350, A321, 737NG, A330neo) and used (717, 757) planes.

Delta continues to strive to woo business travelers by renovating lounges around the world, offering gate transfers via Porsche and serving top-notch food, in an effort to ensure that the highest-margin travelers return. In addition, DAL trades for 8.8 times next 12-months earnings and yields 2.7%. Our target price now stands at $74.

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