Based on sales, Delta Airlines (NYSE:DAL) will be the second largest airline in the United States. A recent share price run has pushed Delta’s stock to its highs over the past year, but the valuation is still quite reasonable.
In recent years, Delta has sought to grow revenue from sources outside of just selling flight tickets. Other avenues include premium economy seats, upselling first-class tickets, passes to its private airline clubs, baggage fees and travel insurance. It targets $1 billion in these revenue sources by the end of 2013. This would represent less than 3% of the top line, but much of the revenue would drop to the bottom line.
During its annual shareholder day, Delta also pointed out that it has the lowest unit costs of the large network carriers. This includes archrivals United Continental Holdings (NYSE:UAL), U.S. Airways (NYSE:LCC) and American Airlines, the last of which recently declared bankruptcy and had the highest per unit costs. Only Southwest Airlines (NYSE:LUV) had lower per unit costs.
Outlook and Valuation
Cost efficiencies and lower fuel costs are expected to give Delta a boost over at least the next two years. For all of 2012, analysts project sales growth north of 5% and total revenues of nearly $37 billion. They expect this to grow another couple of percent to $38 billion by the end of 2013. Profit projections over these two years are $2.28 and $2.66. Based on the current share price of $11.66, the forward P/E is below 5.
The Bottom Line
United Continental, which is projected to report nearly $39 billion in revenues this year, also trades at a single-digit forward earnings multiple. The free cash flow multiples are equally compelling for the two largest players. Last year, Delta reported roughly $1.6 billion in free cash flow, or approximately $1.89 per diluted share. This works out to a trailing cash flow multiple of 6, and the forward multiple will likely be lower. Smaller airlines, including Spirit Airlines (Nasdaq:SAVE), are likely to grow faster, but Delta should have the clout to remain profitable through another economic downturn. Industry consolidation in recent years should also favor the larger players in the domestic space.
At the time of writing, Ryan C. Fuhrmanndid not own shares in any of the companies mentioned in this article.