Many people avoid investing in airlines, but one insider ignored that trope and the benefits of diversification in one fell swoop on Monday. Delta Air Lines, Inc. (NYSE:DAL) CFO Paul Jacobson directly purchased 50,000 shares of the company’s stock at an average price of $9.34 per share, putting nearly half a million dollars of his own money behind the large airline. Since insider purchases tend to be bullish signals on a statistical basis, investors who look for such signals would be advised to consider buying in to Delta as well or at least examining the company more closely rather than dismissing it on industry grounds. Jacobson became CFO in March after the previous officer retired from the position. Earlier this year, in early May, Board member Paula Reynolds bought 10,000 shares at $10.81 per share; however, a large number of insider sales at Delta took place at prices between $11 and $12. While insiders may sell for a number of reasons, including diversification, the magnitude and consensus behind these sales would seem to indicate that at the time company insiders legitimately doubted that the stock price would go much higher.
Perhaps surprisingly, a number of hedge funds increased their exposure to Delta Air Lines Inc. (NYSE:DAL) in the first three months of 2012. Lansdowne Partners initiated a 19.5 million share position, which according to the fund’s 13F filing made it one of its top ten holdings (see other stock picks from Lansdowne Partners). Ken Heebner’s Capital Growth Management increased its stake by 10% compared to the beginning of the year and finished the quarter with 19.9 million shares (find out what else was in the fund’s portfolio). PAR Capital Management, managed by Paul Reeder, also increased its holdings; the fund reported owning 15 million shares at the end of March.
Delta’s last quarterly filing, for the second quarter of 2012, reported revenue up 6% from the second quarter of 2011. Revenue increased both in mainline operations and in regional carriers. Fuel costs, however, grew by 24% and caused Delta Air Lines, Inc. to take a $168 million quarterly loss compared to the $198 million gain it had recorded in the same quarter of the previous year. For the first half of the year, compared to 2011, Delta grew its revenue and trimmed its losses though cash flow from operations declined. Delta now trades at a trailing P/E ratio of 9 following a 40% increase in its stock price over the last year. Based on analysts’ estimates, the stock trades at only 3 times its 2013 earnings and its five-year PEG ratio is only 0.1. If the sell-side is to be believed, and if concerns about airlines as investments can be dealt with (Delta itself is just over five years out of bankruptcy), Delta is a screaming value stock and Jacobson’s investment should easily rise in the future.
The closest peer for Delta is United Continental Holdings Inc (NYSE:UAL). United Continental trades at 15 times trailing earnings but, again, analysts promise high growth in the future: United Continental Holdings Inc (NYSE:UAL)’s forward P/E is 3 and its five-year PEG ratio is 0.2. US Airways Group Inc (NYSE:LCC), another comparable company, carries trailing and forward multiples of 4 and 3, respectively. Therefore, the market’s sourness on Delta despite its arguable value conditions is not specific to that company- it is more or less the entire major airline industry that is being priced at a low value. One exception to this rule is investors’ continuing romance with Southwest Airlines Co. (NYSE:LUV), which famously broke the mold for delivering passenger air services and- partly due to its double-digit growth rates of revenue and earnings in its last quarter compared to the same period last year- trades at a comparatively high trailing price-to-earnings ratio of 21. We looked at Southwest Airlines Co. (NYSE:LUV) last month. We think that the industry is being pressured by investor concerns over macro growth and fuel prices, but that if an investor hedges these risks Delta Air Lines Inc. (NYSE:DAL) is likely a good value, particularly given the confidence of its CFO in the company.