Will Delta Air Lines Stock See Higher Levels After A 3.5x Growth In Profits?

Delta (NYSE: DAL) saw its net income surge by 3.5x y-o-y to $4.6 billion in 2023. This can primarily be attributed to higher revenues, lower fuel and interest costs, and a gain on the sale of securities. With an improvement in the company’s profitability, its stock has appreciated 20% this year. Looking at a slightly longer term, DAL stock has shown strong gains of 25% from levels of $40 in early January 2021 to around $50 now, vs. an increase of about 45% for the S&P 500 over this roughly three-year period. However, the increase in DAL stock has been far from consistent. Returns for the stock were -3% in 2021, -16% in 2022, and 22% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that DAL underperformed the S&P in 2021 and 2023.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Industrials sector including GE, CAT, and RTX, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could DAL face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months — or will it see a strong jump? From a valuation perspective, we think DAL stock has some room for growth. We estimate Delta’s Valuation to be $55 per share, reflecting over 10% upside from its current levels of $49. Our forecast is based on a little over 8x P/E multiple for DAL and expected earnings of $6.50 on a per-share and adjusted basis for the full year 2024. The company expects its earnings to be in the range of $6.00 and $7.00.

Delta’s revenue of $58 billion in 2023 was up 15% y-o-y, driven by increased capacity, while average yields were slightly down. Delta’s operating income was up 33.5% y-o-y in 2023, with a 130 bps improvement in operating margin to 9.1%. While its SG&A expenditures as a percentage of revenue rose from 4.3% to 6.8% over this period, average fuel prices fell 8% y-o-y, bolstering its margin profile.

Along with the expansion of operating income, the company saw its net income rise from $1.3 billion in 2022 to $4.6 billion in 2023. Other than a rise in operating income, Delta saw its interest expense decline to $834 million in 2023 from $1.0 billion in 2022. This can be attributed to an 11% reduction in total debt from $30.6 billion to $27.3 billion over this period. Furthermore, the company’s non-operating income/expense improved meaningfully with a $1.3 billion gain on investments, versus a loss of $783 million in 2022.

Even on an adjusted basis, Delta’s net income doubled to $4 billion in 2023, with its adjusted net income margin expanding 280 bps y-o-y to 6.9%. This resulted in earnings surging from $3.20 to $6.25 on a per share and adjusted basis over the same period. The company’s outlook for 2024 is solid, with adjusted EPS expected to be in the range of $6 to $7.

Given the robust travel demand, Delta should be able to continue to expand its margin profile in the coming years with disciplined spending, assuming a stability in fuel prices. Delta’s average fuel price per gallon stood at $2.79 in Q1’24 (down 7% y-o-y) and the company expects it to be in the range of $2.70 and $2.90 in Q2’24. Moreover, we think that despite its 20% rise this year, DAL stock appears to have more room for growth.

While DAL stock may see higher levels, it is helpful to see how Delta’s peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 6/17/2024
[2] Cumulative total returns since the end of 2016

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