Should You Buy Delta Stock After A Downbeat Q1?

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Upside
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Trefis
DAL: Delta Air Lines logo
DAL
Delta Air Lines

Delta Air Lines stock (NYSE: DAL) is up 4% in a month, aligning with the 5% rise for the broader S&P500 index. Despite its recent surge, DAL stock looks undervalued, in our view. Last week, the company reported its Q1 2023 results, with revenue of $11.8 billion, up 45% y-o-y and falling below the consensus estimate of $12.0 billion. The total available seat miles (ASM) grew 18% y-o-y while its passenger revenue per available seat mile (PRASM) rose 27% to 16.97 cents. The company saw its adjusted operating margin improve to 4.6% from -9.7% in the prior-year quarter. Higher revenues and margin expansion led to a significant rise in the bottom line to $0.25 on a per share and adjusted basis, vs. a loss of $1.23 in Q1 2022. Still, earnings fell short of the $0.30 consensus estimate.

Despite downbeat results, DAL stock moved higher, primarily due to its strong guidance. It expects Q2 sales to rise 16%, operating margin to rise to 15%, and EPS to be around $2.13 (all figures are at the mid-point of provided range). This outlook boded well with investors.

The rise in Delta’s revenues over the recent years can be attributed to a rebound in air travel demand, with passenger traffic and ticket yield rising meaningfully in the last few years. For perspective, Delta’s RPM surged 2.7x, and PRASM grew 80% between 2020 and 2022. The demand for air travel is expected to remain high in the near term, boding well for Delta.

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We have updated our model to reflect the latest quarterly results. We now estimate Delta Air Lines’ Valuation to be $50, reflecting a 45% upside from its current level of $35. At its current levels, DAL stock is trading at 6x forward expected adjusted earnings of $5.55 (per Trefis estimates), compared to an average of 9x seen over the last two years, implying that the stock is undervalued. Furthermore, the travel demand will likely remain high in the near term, despite slowing economic growth, as consumers prioritize travel spending over other areas.

While DAL stock looks undervalued, it is helpful to see how Delta Air Lines’ Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised at how counter-intuitive the stock valuation is for FedEx vs. Amkor.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

 Returns Apr 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 DAL Return -1% 5% -30%
 S&P 500 Return 1% 8% 85%
 Trefis Multi-Strategy Portfolio 2% 10% 246%

[1] Month-to-date and year-to-date as of 4/18/2023
[2] Cumulative total returns since the end of 2016

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