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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Delta

May 14th 2015

Delta
NYSE Symbol: DAL
Industry: Airlines
Price as of 5/13: $46.78

 

A good rally last week pushed the Dow and the S&P 500 up to a 3% year to date return. The Nasdaq is up 6% year to date while the big winners are Europe and the Emerging markets both up over 8% year to date. It's getting tougher and tougher to find good value in the markets. Now that we're in the seasonally slow May to October season, it wouldn't take much to initiate a correction. In the meantime it's best to invest in conservative funds or stocks with solid dividends or strong cash flow. Speaking of strong cash flow, the airline fundamentals continue to improve. For an industry that traditionally has been an awful investment, the airlines thanks to deregulation have been consistent and stable money makers.  US Airways, now American Airlines, is up 100% since we recommended it in November 2013 while Delta Airlines is up 18% since we featured it in August of 2014. Boeing, a prime beneficiary of the airlines is up 21% since we featured it in August of last year and up 11% since January of this year when we featured it again.  Thanks to a new share buyback and a hike in their dividend, we will once again feature Delta Airlines. In the short term, Delta and the airlines in general may remain in a trading range, but with strong cash flow and cheap valuations, Delta and the rest of the airlines should outperform the markets over the next several years.

On April 15th, the nation's third-biggest airline company behind American and United, reported first-quarter net income of $746 million, or 90 cents per share, up from $213 million, or 25 cents per share, in the same period last year.  Revenue rose 5 percent to $9.39 billion, matching estimates. A big benefit to the quarter was due to lower oil prices. Including regional Delta Connection flights, the company spent about $600 million less on fuel than a year ago, a savings of 22 percent. However, Delta paid for its strategy of hedging against fuel price spikes. Delta took a write-down of $372 million on its hedging contracts on top of the $1.2 billion that it took in the previous quarter. All in all it was another great quarter. Fast forward to this week, Delta  announced a new $5 billion share repurchase program (13% of the market cap), and a dividend increase of 50% to $0.135/share beginning in the September. The cash flow is amazing. This year Delta is expected to generate almost $8 billion of operating cash flow before major expenditures. For the next three years Delta is expected to generate $4 to $5 billion in free cash flow following expenditures. Delta said it plans to cut adjusted net debt to $4 billion by the end of 2017 from $7.4 billion today. The reduced debt level will result in an annual net interest expense of about $200 million, $1.1 billion less than in 2009.

Even with all this great news, Delta's stock remains in a tight trading range between $50 and $42 a share since December. In its current range, Delta is trading for 10 times earnings, 8 times 2016 earnings, 1 times sales, and 4 times book value. Thanks to the dividend hike, the dividend yield is up to 1.1%. The valuation for Delta is not only low, but should get better over the next year. With the $5 billion share buyback or 13% of the market capitalization, Deltas' earnings estimates should move higher with the reduction of outstanding shares. In the short term, Delta and the rest of the markets may remain in a trading range, but longer term the strong cash flow and share buybacks should boost returns for Delta's stock price. Following earnings back in April, the analyst at Imperial Capital reiterated its price target of $69 a share or 46% higher than current levels. Delta looks like good risk reward in market that may see a correction.