The airlines continue to get no respect, led by Delta Air Lines ($DAL). Anyone just needs to look at the recent rally in the cruise line sector to see how the stock market is irrationally negative on the airlines. The investment thesis remains ultra Bullish on airline stocks like Delta.
For the last year, the market has told investors to not buy airline stocks due to an impending recession. Airlines like Delta have made tons of money and returned to cash flow positive, yet the stock hasn't rallied from the early 2021 levels when signs existed that travel demand would rebound from the covid destruction.
The amazing part here is that the cruise lines were about a year behind the airlines in removing covid restrictions and returning to profits and positive cash flows. Most airlines reported strong profits starting in Q2'22, though Delta reported small profits at the end of 2021.
Cruise lines like Carnival Corp. ($CCL) and Royal Caribbean ($RCL) were still reporting large losses in the last couple of quarters. In fact, the forecast is for Carnival to report another large loss for the just ended May quarter due to the inclusion of March in the quarterly results.
In essence, the airlines are far ahead of the cruise lines in the travel recovery, but oddly the stocks have underperformed. For the YTD period, Royal Caribbean and Carnival have seen share price gains of ~93% versus the solid, but much smaller, 28% gain for Delta.
The amazing part is that Delta has forecast a return to near record EPS in 2024. The airline is forecasting an EPS of up $6 this year for a stock trading at only $42 now.
While Royal Caribbean has a goal of hitting a record EPS in 2025, the cruise line is only now starting to generate profits. Carnival has no such plan to return to record profits anytime soon, but the stock has rallied anyway.
A prime example of the disconnect here are the forward PE ratios. Delta trades at only 6x PE targets while Royal Caribbean is now up at 14x and Carnival trades at a market multiple of 19x.
The share price move is strange considering Delta is in a better financial position, having returned to positive cash flows sooner. Logic would say the casino is missing an obvious big play in $DAL.
-Check The Balance Sheet-
A big key to the forecasts of Delta is the return to large positive cash flows. Previously, the airline returned billions in capital to shareholders annually via mainly stock buybacks and now these cash flows will repay debt.
Delta ended Q1 with net debt of $15.4 billion, but the company still has debt far above pre-covid levels. The airline forecasts a combination of lower capex and higher income, leading to over $6 billion in positive cash flows through the end of 2024 to drive net debt far lower.
The airline should end 2024 with net debt back towards the early 2020 levels. Delta Air Lines should generate $4+ billion in annual free cash flows starting in 2024, leaving the airline with the options of either pushing towards positive cash balances or starting to repurchase extremely cheap shares here.
One of the biggest aspects missed by the business return to normalization is that the loyalty plan offers a huge revenue boost over 2019 levels. Delta works with American Express ($AXP) on Delta Skymiles and the remuneration from the plan has grown from $4 billion in 2019 to a goal of $7+ billion in 2024.
These high margin revenues provide a huge upside to the potential profits versus the $7.33 earned back in 2019. As the interest expenses are cut back to pre-covid levels or lower, investors should start looking at the potential for Delta to earn $8 to $9 per share in 2025 and beyond.
-TL;DR-
The key investor takeaway is that Delta remains cheap. The stock should trade at an equivalent, or higher, forward PE multiple than the cruise lines. The airline remains on a solid path to hitting the $7+ EPS target in 2024 and the stock should ultimately follow the debt repayments Delta will undertake in the next year to much higher prices.
Falling energy prices and the AMEX remunerations are additional catalysts for faster profits and cash flow.
(Not a financial advisor. Do your own research etc etc etc)
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