Delta Air Lines Earnings Case Study

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• DAL’s earnings power will continue improving as the company will benefit from further reductions in fuel and non-fuel unit costs.
• DAL is also focusing on top-line improvement by increasing its network in Brazil and other key growth markets, which will allow it to further improve the bottom line performance.
• DAL has an attractive valuation even though it trades at 52-week highs, while the company also has industry-leading ROIC, FCF, and earnings multiples, which strengthen the bull case.
Delta Air Lines: Should You Buy At 52-Week Highs?
Over the past three months, Delta Air Lines (DAL) has started gaining steam once again. Its shares have increased over 11%, and this could be attributed to the company’s consistent earnings performances
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In this article, we will take a closer look at the reasons why Delta Air Lines’ earnings will continue getting better in the long run.
Low fuel and non-fuel costs will drive Delta’s bottom-line performance
Delta Air Lines will continue benefiting from low cost of purchasing fuel. For instance, last quarter, its fuel purchase costs dropped 42%. More importantly, Delta’s average price per gallon has declined 44% to $1.67 from $2.98 per gallon last year. In fact, its total average price has fallen approximately 41% this year, playing a vital role in enhancing its earnings. The following chart clearly shows the decline in Delta’s fuel costs. Source: Delta Air Lines
In addition, Delta is strategically reducing its non-fuel unit costs. As compared to lower fuel costs, the decline in non-fuel unit costs will be more stable from a long-term point of view as fuel costs are related to oil prices. On the other hand, non-fuel costs are dependent on Delta’s operational efficiency. This is the reason why the company is taking steps to lower maintenance costs, increase productivity, and upgauge the
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According to the IATA, from 2014-2034, Brazil will add 170 million passengers. As such, Delta Air Lines has done the right thing by tapping this market for growth and increasing its stake in the Brazilian airline.
An attractive valuation is another positive
Even though Delta Air Lines is trading at a 52-week high, the stock is still a good bet. This is because its valuation clearly indicates further bottom line growth in the future. It trades at less than 15 times last year’s earnings, while the forward P/E is less than 9. Additionally, a PEG ratio of less than 1, at 0.52, is another indication of undervaluation.
At this valuation, Delta Air Lines looks like an enticing proposition, especially since it has industry-leading metrics and has one of the most attractive valuations. This is evident from the chart given below: Source: Delta Air Lines
Conclusion
Hence, there are a number of reasons why Delta Air Lines is still a good bet even though it trades near the higher end of its 52-week band. The company’s earnings power will continue getting better as costs decline and it taps growth markets such as Brazil. So, I think that Delta Air Lines is a stock to hold from a long-term point of view as it can break beyond its 52-week

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