Pros and Cons to Buying Delta Air Lines, Inc. (DAL) Stock

The outlook is generally positive for the U.S. airline sector, as consumers — increasingly flush with cash — are flying the friendly skies more often these days. According to the U.S. Bureau of Transportation, U.S.-based airlines flew an estimated 75.8 million passengers in September, an increase of 11.5 percent from a year ago.

Among the industry’s major U.S. carriers, Delta Air Lines, Inc. (NYSE: DAL) stands out for investors looking for a company that’s managed well, is on a good financial path and is primed to capitalize on a continued strong economy. With a long history of innovation, Delta was the first airline to use those ubiquitous video “moving maps” to inform customers in the cabin (in 1992), the first to track flight progress, the first to ban smoking on flights (in 1995), and was the first to fly 100 million passengers in a single year (in 1997.)

[See: 7 Airline Stocks to Buy as Pricing Soars.]

Is Delta stock a “first” among airline stocks as it faces competition from major carriers such as American Airlines Group ( AAL), Southwest Airlines Co. ( LUV) and United Airlines ( UAL)? Here’s what airline and investment experts had to say.

DAL stock at a glance. Airline stocks have had a roller-coaster ride in 2018, and Delta is no exception. Delta is down 5.9 percent so far this year, better than Southwest (down 12.3 percent) and American (down 39 percent), but worse than United Airlines (up 27 percent) and the Dow Jones Industrial Average (up 2.5 percent)

Analysts seem generally bullish on DAL stock. Walletinvestor.com expects Delta’s share price to rise to $66 in one year, and to $92 in five years. That would mean a $100 per-share investment today would translate into $169 per share by 2023. “The long-term earning potential is 20.9 percent in one year,” the company predicts.

The company also beat earnings projections for the third quarter, reporting earnings of $1.80 per share versus analysts’ expectations of $1.74. Revenue for the airline was $11.95 billion, better than the $11.92 billion that was expected. “Demand for the Delta product has never been greater,” CEO Edward Bastian told analysts during the company’s Oct. 6 earnings call.

Pros to buying DAL stock. Delta has been in a steady “lift-off” mode over the past two years, with the company’s share price rising from $34 per share to its current level of $53 per share.

Some investment experts note that it’s no coincidence that Delta brought in a new chief executive officer at the same time DAL stock began to really take off.

A lot has to do with leadership and taking smart risks,” says Anne Drougas, professor of finance and accounting at Dominican University’s Brennan School of Business. “Leadership begins at the top and when Ed Bastian took the helm in May 2016, he brought to the position 20 years of experience at Delta. In an economy where transitioning from job to job every few years may seem the norm, Bastian’s seniority and promotion over 20 years built loyalty from within and demonstrates he must have done many things right.”

Bastian comes from the CEO school where the philosophy is simple and direct — if you take care of your people, they will take care of the customer and of you. “Loyalty is not a word to Delta’s CEO, it is a lifestyle and appears to permeate the culture of Delta,” Drougas says.

Revenue-wise, Drougas says that Delta’s altimeter is set in the “launch” position.

“As fuel prices begin to rise, airlines are beginning to raise baggage fees,” Drougas says. “Delta was one of the first and American quickly followed. Revenue passenger miles increased in the summer months compared to last year. The airline is dabbling in facial recognition technology in order to move passengers more quickly.”

[See: 9 ETFs to Cash In on Consumer Spending.]

That’s not all. Capitalizing on the tax reform benefits, earnings-per-share has increased 11 percent, while its revenue stream is more diversified due to a strong loyalty reward program with American Express ( AXP); strategic alliances with Air France-KLM, Korean Air and Aeromexico; and branding premium seating.

“Also, Delta just closed a $1.4 billion tax-exempt bond to finance renovations at LaGuardia, a signature hub for the airline,” Drougas says. “Delta is giving the customer what he or she wants and is capitalizing on strong international growth. Corporations are choosing Delta, too.”

Cons to buying DAL stock. There are some downsides linked to Delta, however.

In its September 2018 traffic report, DAL reported that load factor — the percentage of airplane seats that is taken up by passengers — fell in the last 30-day period. Additionally, Mother Nature appears to be stripping the bark off of DAL profits, as Hurricane Florence will likely prune $30 million off of Delta’s third-quarter pre-tax income.

There’s more — Delta is taking a short-term financial hit, albeit for a good reason.

“Delta has an older fleet but it is replacing its domestic fleet with more energy-efficient aircraft,” Drougas says. “While revenues are higher, Delta is being fiscally responsible regarding its costs and higher fuel prices.

Analysts are closely watching DAL’s earnings reports for signs of slower growth. “Challenges continue to be jet fuel prices, which have increased between 40 and 50 percent from last year, leading Delta and other airlines to begin raising baggage prices,” Drougas says. “Amounting to roughly 25 percent of airline revenue, increased baggage prices may be enough for passengers to substitute driving for flying during the busy holiday season.”

Another issue for Delta is that sales have been pretty flat over the last few years, but that scenario is no game-changer.

“Delta’s debt load seems to be manageable,” says Holmes Osborne, principal at Osborne Global Investors. “Free cash flow, which is what is the cash left over after reinvesting into things like new planes and equipment, has been pretty good.”

While that’s certainly a plus for stocks in general, Osborne says he’d still “pass” on DAL stock because investors are 10 years into a bull market and Delta’s sales have been flat. “If sales are flat in a strong economy, what will they be like in a weak economy?” he asks.

The bottom line on DAL stock. From a value investing standpoint, DAL, as well as several other airlines, looks to be very attractively priced on several metrics.

“Delta is currently selling at a trailing P/E ratio of 12 and a forward P/E of 8.7,” says Robert Johnson, co-author of “Strategic Value Investing.” The trailing and forward P/Es of the S&P 500 are double that of DAL, at 17 and 25, respectively.”

And it helps to have Warren Buffett making your case as an airline stock that’s on an upward flight path.

[See: 7 of the Best Dividend Stocks to Buy for 2018.]

“Delta, Southwest and American Airlines all receive the Berkshire Hathaway ( BRK.A, BRK.B) seal of approval, as Warren Buffett’s firm has major holdings in those three airlines,” Johnson says. “DAL is Berkshire’s largest airline holding and the 11th-largest holding of Berkshire. Berkshire’s cumulative stake in DAL is over $3.1 billion, and the stake was increased by over 10 million shares in the second quarter of 2018.”

With Buffett’s seal of endorsement and solid management, DAL stock appears to be on a bullish path.

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Pros and Cons to Buying Delta Air Lines, Inc. (DAL) Stock originally appeared on usnews.com