We came across a bullish thesis on Delta Air Lines, Inc. (NYSE:DAL) on ValueInvestorsClub by Sturges95. In this article, we will summarize the bulls’ thesis on DAL. The company’s shares were trading at $65.91 when this thesis was published, vs. the closing price of $53.28 on Mar 07.
A team of airline employees surrounded by flight deck controls, with a variety of aircraft outside.
DAL provides air transportation for passengers and cargo in the United States and internationally. The company operates through two segments, Airline and Refinery.
One of DAL’s biggest strengths is its partnership with American Express since 1991 through a co-branded credit card. This deal accounted for $4.1 billion of DAL’s revenue in 2019 and this year it amounted to over $7 billion. This figure represents 8% of card spending by Amex customers and 22% of the total card loans. Amex provides DAL with access to a premium customer base and the SkyMile program features some of the leading global airlines. Without this program, EBITDA margin would be close to 12% but SkyMile expands the margin to 15.4% based on YTD 2024 data.
The premiumization of the airline industry post Covid has also helped DAL’s cause with customers looking to spend more on services like first/business class and other loyalty programs. DAL is looking to increase its premium revenue contribution to 37%, up from 35% in 2023. LCC and ULCC operators have also entered this space but this would be a tailwind for DAL due to its superior offering.
The capacity constraints brought about by supply chain delays and issues with Boeing and Airbus have reduced the growth rate from the historical LDD to HSD in the last few years. With LCC and ULCC trimming their capacity due to financial pressure, it offers DAL an opportunity to capture more market share without compromising on pricing. Revenue for DAL should increase at MSD under these circumstances.
The revenue growth assumption for next quarter should be in the higher range of the guidance provided by DAL, i.e. 7-9%. With an operating margin of 7.2% and a forward fuel price of $2.35, DAL should generate a forward EPS of $7.77, an estimate that is higher than the street projection of $7.53. DAL is currently trading at ~6.8x its next year earnings and a reasonable multiple of 12x when applied, could offer a 75% upside.
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This article was originally published at Insider Monkey.
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