Why Delta Air Lines Stock is About to Take Flight

There’s a lot to like about Delta Air Lines stock right now.

Delta Air Lines (DAL – yield 2.4%) is a U.S. and international passenger and cargo airline with an extensive and efficient hub complex. The company participates in multiple joint ventures with foreign airlines, and recently increased its stake in Mexico’s Grupo Aeromexico to 49%. Delta was named World’s Most On-Time Airline in 2017 by FlightGlobal.

Despite increased fluctuations in 2018 energy prices, Delta expects to achieve margin expansion in late 2018, contributing to annual profit growth. Wall Street expects Delta’s non-GAAP earnings per share (EPS) to grow from $4.93 in 2017 to $5.59 in 2018 and $6.64 in 2019, reflecting very strong EPS growth rates of 13.4% and 18.8% in 2018 and 2019. It’s important for investors to know that consensus EPS estimates change frequently for airline stocks, with the price of airline fuel being a big factor in the constant adjustments. So the important thing to focus on with Delta is that it’s a very profitable company, and that profits continue to grow at a brisk pace.

Like Apple Inc. (AAPL), DAL is both a growth stock and a value stock. The stock’s 2018 and 2019 price/earnings ratios are quite low at 10.4 and 8.8, respectively, leaving lots of room for share price increases before anybody would consider the stock to be overvalued.

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Delta pays a quarterly dividend of $0.35, which increases annually during the third quarter. The current yield is 2.4%. Delta has also been spending cash on share buybacks, repurchasing 4% to 6% of basic outstanding shares in each of the last three years. Delta’s debt carries investment grade credit ratings from the three major rating agencies, and the company is focused on continued debt reduction.

Warren Buffett, famed CEO of Berkshire Hathaway (BRK), owns 9.5% of the outstanding shares of Delta Air Lines stock. Investors should be aware that Berkshire Hathaway had $111 billion in cash at the end of June 2018, and Buffett has stated that he’s looking to buy a company – not just a block of stock, though. Buffett is interested in buying an entire company, and he specifically mentioned an interest in owning an airline.

Delta Air Lines has a market capitalization of $40 billion. Berkshire Hathaway could easily afford to buy Delta at an attractive premium to the current share price, while still holding tens of billions of dollars in the bank!

Buffett might consider owning Delta Air Lines or Southwest Airlines (LUV), which has outstanding fundamentals – revenue, profit, debt, valuation – as does Delta. Bigger airline peers such as American Airlines (AAL) and United Continental Holdings (UAL) have dramatically higher debt ratios than Delta and Southwest, so it would make sense for Buffett to avoid those companies as he ponders a shopping spree.

Delta Air Lines Stock on the Rise

In January 2018, DAL stock rose to 59, its highest price since exiting bankruptcy in 2007. Then came the 2018 U.S. stock market correction, which caused DAL to trade sideways for seven months. As the market came out of its funk, both the S&P 500 index and DAL retraced their January highs in recent weeks (see chart below).

Delta Air Lines stock has been on a tear for more than two months - with more room to run. A recovery from a price correction can be a very bullish time to buy a stock, presuming that there was no bad corporate news that caused the initial drop in the share price. And in the case of DAL, the drop-off was due simply to a stock market correction. The company continues to thrive!

Now that DAL is once again trading in the high 50s, I expect the stock to surpass 59 quite soon and begin a new run-up that could easily bring DAL into the mid-to-upper 60s over the next three to 12 months.

Delta Air Lines stock could appeal to growth stock investors, value investors, investors who look for rising dividends, investors who enjoy the possibility of owning a takeover stock, and traders who would be happy to make 10% profit in a matter of months. Be ready to own DAL stock soon, especially upon a breakout past 59.

Crista Huff

Buy Low, Sell High

Crista Huff is the lead analyst of Cabot Undervalued Stocks Advisor. Her goal is to assist you in outperforming the major U.S. stock market indexes while minimizing risk, by screening many hundreds of stocks for growth, value and bullish technical charts.

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