Yahoo Finance 4 Things to Know Before Buying Delta Air Lines, Inc. (DAL)
Reputation is a fickle thing. One day, it's pristine, the next it's questioned, doubted and forgotten, taking years to recover.
Delta Air Lines (DAL) has a reputation of being one of the most reliable airlines in the nation. It's third in customer satisfaction and on-time arrivals, according to Wichita State University's Airline Quality Rating, and it's first among large carriers.
That's why when thousands of flyers were recently stranded from a power outage in Delta's computer system, the company had to act quickly to save the name it's built over years.
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Delta's stock, on the other hand, hasn't been as fortunate. The stock has fallen nearly 10 percent in the last 12 months and 28 percent so far in 2016 -- worse than many of its peers the airline sector.
Here's how DAL stock looks moving forward.
Consolidation still provides opportunity. Over the last decade, the airline industry has become even more consolidated. The last large airline merger -- American and US Airways combined to form American Airlines Group (AAL) -- left the U.S. with four carriers accounting for about 80 percent of capacity.
Delta, AAL, Southwest Airlines Co. (LUV) and United Continental Holdings (UAL) are controlling the space. "Over time, this should bode well, for capacity and pricing," says Jack Atkins, an analyst for Stephens, a financial services firm. That "should in turn bode well for the valuation," he says.
Since Delta and the other three players control so much of the airspace, they can more easily predict how many seats will be filled on flights and adjust if the economics of more or less flights becomes favorable.
But lower-than-expected fuel costs have not played to Delta's strength. Relatively cheap fuel allows regional airlines to offer more flights and still remain profitable. Meanwhile, Delta is seeing a reduction in its per-passenger profits.
The best situation for Delta is if oil prices slowly grind higher, Atkins says.
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Internationally, there's less control of the skies. Delta earns more than 30 percent of its revenue from international flights. This area of the company doesn't benefit from the consolidation seen in the U.S., reducing the flexibility it has to adjust to changes in flight demand. "It's more difficult to make the pricing environment what they want," says Stifel analyst Joseph DeNardi.
Revenue in Delta's Pacific region fell 12.2 percent last year, and that has continued into this year, with second-quarter results falling 8.3 percent compared to the same time period of 2015.
But much of this struggle comes from the strength of the dollar, which led to many of the declines when they transfer the revenues into U.S. currency. This adds to the tough pricing environment internationally, DeNardi says.
August's failure, and other short-term concerns. Thousands of Delta flights were grounded for days earlier this month after a widespread computer failure, which was a black mark for both Delta's brand and its bottom line. A similar outage for Southwest Airlines earlier this year cost that airline $54 million.
Delta's reputation for reliability -- as well as its $40.7 billion in annual revenues -- should help DAL stock in the long run. Delta has "the best reliability in the industry," Adkins says, which allows it to charge a premium price.
"If this is a one-off offense, it's able to recover from this. If this continues to happen, it raises another issue for them and becomes more of a reputational problem," Atkins says.
Another issue is Delta's labor contracts. Delta officials are discussing a new contract with its pilots, but negotiations have gotten so contentious that a mediator suspended discussions for three weeks.
The pilots happen to be renegotiating while Delta is "more profitable than they have ever been," DeNardi says. "Pilots see how much money Delta is making."
DeNardi says he believes the contract will be worked out without having a long-term impact on DAL stock.
The price is there, but expect turbulence. Delta's stock has been grounded of late. It's trading at a very low, six times forward price-earnings. To put that in perspective, the Standard & Poor's 500 index 12-month forward P/E is near 18, while Delta itself had a 10x mark just two years ago, Atkins says.
Atkins believes that the consolidation movement will prove its worth over the next few years, driving up that P/E. He has a target of $65, a 77 percent upside to the current price. But, he admits, it's an industry that's "challenging for long-term investors," since it's unclear if and when the consolidation efforts will kick in.
Investors will get paid to wait, though, as Delta has only given out an authorized $2 billion of a $5 billion share repurchase program that's set to finalize in May 2017.
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But what's clear if you do buy in: expect turbulence, since it won't necessarily be a comforting ride.
Best Airline Stocks
Stock | Price | 1-Year Return |
$45.85 | 106.69% | |
Skywest Inc. SKYW | $27.96 | 80.54% |
$55.94 | 77.42% | |
$36.70 | 1.34% | |
$36.72 | 1.20% | |
$68.33 | 7.52% | |
$47.53 | 8.64% | |
Spirit Airlines Inc. SAVE | $39.79 | 22.45% |
$16.01 | 25% |
Stock information correct as of August 25, 2016
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