Part of the challenge of the stock market comes from the fact that stocks don’t always react the way you would expect.
What you may perceive as good news or positive indicators can often be interpreted in an entirely opposite fashion; in the same way, it isn’t a given that what is generally considered as negative information will have a commensurate, negative reaction.
In the Airlines industry, the narrative for most of the past three and a half years has been centered on the impact of the pandemic and its restrictions on travel demand. In the last year or so, airlines have reported healthy increases in demand that have lifted their own forecasts and begun to boost bullish sentiment for the industry. For some companies, such as Delta Air Lines Inc (DAL) that rise in demand has allowed management to reinstate dividend payouts that had been suspended early in the pandemic. DAL reinstated their dividends after their most recent earnings announcement, with their first payout since the first quarter of 2020 coming last week.
Like most stocks in the Airlines industry, DAL has struggled to recover from the effects of 2020, and the collapse in travel demand that accompanied the pandemic. recently, however, the stock has picked up a lot of bullish momentum, rallying from around $33 in late May to a peak earlier this month at nearly $50 per share. That surge confirms a longer upward trend for the stock that began in October of last year.
The real question, of course is whether the latest rally is simply being fueled by market optimism, or is there enough fundamental strength behind it to suggest that the rally could continue. For bargain hunters, there is also the natural additional question of whether the stock offers a useful value at its current price. Let’s run through the numbers so you can decide for yourself.
Fundamental and Value Profile
Delta Air Lines, Inc. provides scheduled air transportation for passengers and cargo throughout the United States and across the globe. The Company’s segments include Airline and Refinery. The Company has hubs and market presence in Amsterdam, London-Heathrow, Mexico City, Paris-Charles de Gaulle and Seoul-Incheon. Its airline segment is managed as a single business unit that provides scheduled air transportation for passengers and cargo throughout the United States and around the world and includes its loyalty program, as well as other ancillary airline services. Its refinery segment operates for the benefit of the airline segment by providing jet fuel to the airline segment from its own production and through jet fuel obtained through agreements with third parties. The refinery’s production consists of jet fuel, as well as non-jet fuel products. It also provides maintenance and engineering support for its fleet of approximately 1,250 mainline and regional aircraft. DAL’s current market cap is $31.2 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased by 86.11%, while revenues increased by 12.69%. In the last quarter, earnings increased by 972% (not a typo), while sales grew by more than 22%. The company’s operating profile shows signs of strength; over the last twelve months, Net Income was 5.36% of Revenues, and increased to 11.73% in the last quarter.
Free Cash Flow: DAL’s free cash flow was $808 million over the last twelve months, a number that increased from $347 million a year ago, but is below the $1.2 billion mark of the last quarter. The improvement is a sign of strength when so many companies in other sectors are showing signs of deteriorating profitability under current market conditions.
Debt to Equity: DAL’s debt/equity ratio is 2.24, which is high, but not unusual for Airlines stocks. In the last quarter, cash and liquid assets were a little over $11.6 6, while long-term debt was around $18.1 billion. The company’s operating profile and balance sheet are both good indications that servicing their debt is not a problem.
Dividend: DAL’s newly reinstated their dividend after the latest earning announcement, at a rate of $.40 per share, which translates to an annualized dividend yield of about 0.83% at the stock’s current price.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target at around $100 per share. That means the stock is impressively undervalued, with 108% downside from its current price.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The chart above displays DAL’s price action over the last year. The red diagonal line displays the stock’s upward trend, from a low point in October of last year at around $27, to its peak earlier this month at nearly $50 per share. It also provides the baseline for the Fibonacci retracement lines on the right side of the chart. The stock’s latest surge of bullish momentum has pushed it well above all three retracement lines, marking current support at around $46 where last pivot low occurred, and immediate resistance expected at around $50, at the stock’s 52-week high. A push above $50 should have upside to about $54, based on the current distance between support and resistance, while a drop below $46 should find next support at around $43, where the stock saw some brief consolidation in mid-June.
Near-term Keys: At its current price, DAL offers a very tempting value proposition, with a reinstated dividend and healthy balance sheet providing fundamental strength. The aggressive, bullish slope of the stock’s upward move over the last two months, however begs the question of how sustainable its current levels are. If you’re going to use DAL as a long-term, value-based opportunity, you need to acknowledge the fact that a bearish reversal could easily see the stock drop significantly below its current price. If you prefer to work with short-term trading strategies, you could a drop below $46 as a signal to consider shorting the stock or buying put options, with a practical profit target at around $43 per share. A push above $50, however should be taken as a good signal to buy the stock or work with call options, using $54 as a useful profit target on a bullish trade.