Analyst on Wall Street Believes Prominent Stock Possesses Potential 57% Growth. Is an Investment Warranted?
Delta Air Lines' (DAL) recent investor day presentation sparked a wave of upgrades from major financial institutions like Deutsche Bank, UBS, Citi, and Morgan Stanley, with the latter maintaining an overweight rating and putting a $100 price target on the stock. But is Wall Street overly optimistic, or are these sky-high targets justified?
## Delta's Financials: A Convincing Case to Buy
The eye-catching figures discussed in Delta's investor day presentation are hard to ignore. Here are some key takeaways:
- Double-Digit Growth: Management anticipated average double-digit EPS growth over the next three to five years.
- Impressive Free Cash Flow: Delta expected to generate $3 to $5 billion in annual free cash flow, which represents a significant portion of its market cap.
- Reduced Debt-to-EBITDAR Ratio: The company aimed to lower its debt-to-EBITDAR ratio to match the industry average, reducing investor concerns about its debt load.
These impressive figures, when considered in the context of Delta's operations, present a compelling investment case.
Let's delve deeper into how Delta can justify these numbers and why it's trading on relatively low multiples.
Gaining Altitude: Why Delta Stands Out
Traditionally, airline stocks have low valuations due to the industry's cyclical nature. Overcapacity and price volatility in fuel and geopolitical factors have weighed on airline profits. However, Delta, on the other hand, appears to be bucking the trend.
Two critical factors that set Delta apart from its peers are its:
- Pivot to Premium: Delta has shifted its focus towards premium travelers. In 2010, main cabin revenue accounted for 60% of total revenue. By 2024, it is projected to drop to 43%. Meanwhile, premium, loyalty, and other revenue sources are slated to grow from 57% in 2024 to over 60%.
Delta's loyalty programs and co-branded credit cards with American Express are major contributors to its revenue stream. For instance, American Express remuneration to Delta increased from $4 billion in 2019 to an estimated $7 billion in 2024, with a long-term target of $10 billion[1].
- Capacity Management: Delta, like United Airlines, has shown discipline in managing capacity during periods of overcapacity. This behavior could indicate a more sustainable approach to revenue growth.
These two factors help address concerns about Delta's debt load, fluctuations in interest rates, and excessive capacity. Moreover, the industry's newfound focus on capacity management can further bolster confidence in Delta's ability to hit its targets.
Soaring Towards the $100 Target?
Accepting that Delta Air Lines operates beyond traditional airline norms and recognizing the positive industry trends can help investors gain perspective on the stock's potential value.
Delta's premium focus, increased revenue streams, and disciplined capacity management can strengthen the stock's foundation and justify an upward valuation climb over time. While reaching a $100 price target is uncertain, given the strong financial projections and the industry's positive shifts, optimistic analysts' assessments seem founded to some extent.
[1] Delta Air Lines Inc. (2023). Delta's 2024 Investor Day presentation. [PowerPoint Slides]. Retrieved from link
Given the strong financial projections and Delta Air Lines' strategic focus on premium travelers and capacity management, investors might consider dedicating a portion of their investment funds towards this airline. The company's impressive free cash flow and ambitious plans to lower its debt-to-EBITDAR ratio could potentially make it a worthy addition to a diversified finance portfolio.
In light of these factors, some financial analysts have set lofty price targets for Delta Air Lines, with Morgan Stanley maintaining an overweight rating and placing a $100 price target on the stock. While reaching this target is not guaranteed, the airline's unique position in the market and the positive trends within the industry could make such a goal seem less unattainable.
