On Mar 4, 2016, we issued an updated research report on airline behemoth Delta Air Lines, Inc.DAL .
The Atlanta, GA-based carrier continues to reap the benefits of cheap oil, similar to its peers in the airline space. Plunging oil prices have benefited the bottom line of carriers for quite some time now and Delta is no exception. In the fourth quarter of 2015, Delta's bottom-line expanded 51% on the back of low fuel costs. In fact, the carrier expects to generate savings in excess of $3 billion in 2016 due to the fuel cost tailwind. It was this positive commentary that spurred a rise in Delta's stock price after its fourth-quarter earnings release on Jan 19, despite it missing on both earnings and revenues.
Record Profit Sharing
Cheap oil has also ushered in good news for Delta's employees. The carrier, which recorded a whopping $5.9 billion in pre-tax profit (on an adjusted basis) in 2015, thanks to low oil prices, rewarded its employees by shelling out $1.5 billion as part of its profit sharing scheme. This is the sixth consecutive year where the carrier has shared profits with its employees. Moreover, the current payout has hit an all-time record in the history of corporate profit sharing programs.
The payout translated into employees getting in excess of 21% of their 2015 annual earnings. The comparable figure was 16% in 2014. The company stated that it has paid $4.1 billion to employees in profit sharing and shared rewards (monthly bonus for operational excellence) during the past five years. In 2015, employees of the carrier earned in excess of $94 million under the shared rewards scheme.
Moody's Upbeat Take on Delta
Moody's Investors Service, the rating services arm of Moody's Corp. MCO , has been highly impressed with Delta's efforts to reduce its debt levels. The carrier exited 2015 with net debt (on an adjusted basis) of $6.7 billion, reflecting a more than $10 billion reduction since 2009. Interest expenses have consequently come down significantly. The carrier recorded $35 million in interest savings in the final quarter of 2015 on a year-over-year basis.
Moody's believes interest expenses will drop further at Delta as it is expected to continue with its debt reduction strategy. This should help mitigate the pressure on the bottom line and operating cash flow, in the event of oil prices moving north. Moreover, last month Moody's upgraded the airline behemoth's senior unsecured rating to Baa3 from Ba3. The outlook for the rating was stable.
Estimates on an Upswing, Attractive Growth Rate
We note that earnings estimates for Delta have exhibited a healthy uptrend following strong fourth-quarter results. Over the last 30 days, the 2016 Zacks Consensus Estimate of earnings has gone up 19 cents to $6.82 per share. Likewise, the Zacks Consensus Estimate for 2017 has jumped 45 cents over the last month to $6.96.
Delta currently trades at a forward P/E of 7.14x, reflecting a discount compared with the industry average of 8.9x. The attractive valuation is well supported by its long-term estimated earnings growth rate of 27.4%, which exceeds the industry average of 17.5%.
In view of the above positives, we believe Delta Air Lines represents an attractive investment opportunity at current levels. The Zacks Rank #2 (Buy) carried by the company seems to suggest the same.
Other Airline Stocks
Apart from Delta Air Lines, investors interested in the airline space may also consider Southwest Airlines Co. LUV and China Eastern Airlines Corp. Ltd. CEA . Both the stocks sport a Zacks Rank #1 (Strong Buy).