On Friday, Wolfe Research adjusted its outlook on Delta Air Lines (NYSE:DAL) shares, increasing the price target to $60 from the previous $57 while maintaining an Outperform rating.
Wolfe Research's Airline index, which tracks industry performance, saw a slight rise of 0.2% this week, though it lagged behind the S&P 500 by 0.8% and the Transports index by 0.3%. Year-to-date, this index has declined by 2%, underperforming in comparison to the S&P 500's 9% rise and the Transports index's 6.3% gain.
Delta Air Lines, however, has seen a substantial increase of 18% year-to-date, significantly outshining its peers such as United Airlines (UAL), American Airlines (NASDAQ:AAL), and Southwest Airlines (NYSE:LUV), which recorded 4%, a 1% decline, and a 1% decline respectively.
The revision follows Delta's first-quarter report and updated guidance, which led to changes in the analyst's financial model, anticipating improvements in capacity, revenue per available seat mile (RASM), and cost per available seat mile excluding fuel (CASMx), alongside slightly lower fuel costs in the second quarter.
The analyst has revised the second-quarter earnings per share (EPS) estimate from $2.03 to $2.34. Additionally, adjustments have been made to add a margin of safety to the model for the second half of the year, resulting in the full-year 2024 EPS forecast being increased from $6.25 to $6.50, aligning with the midpoint of Delta's own guidance. Looking ahead to 2025, the EPS forecast has been lifted from $7.50 to $7.75, positioning Wolfe Research's expectations 3% above the consensus for the next year.
Delta Air Lines is currently trading at a price-to-earnings (P/E) ratio of 7 times Wolfe Research's 2024 EPS estimate and 6 times the 2025 EPS estimate. This valuation is slightly higher than other legacy airlines. The analyst suggests that if Delta continues to generate sustained free cash flow and reduce debt, its valuation could expand, potentially aligning more closely with historical multiples seen by companies like Southwest Airlines.
The price target increase to $60 is based on a blended average of an 8.0x target P/E multiple and a 6.5x enterprise value to earnings before interest, taxes, depreciation, amortization, and rent costs (EV/EBITDAR) multiple.
Wolfe Research also holds an Outperform rating on American Airlines, while noting that among the Peer Perform rated stocks, United Airlines (UAL), Alaska Air Group (NYSE:ALK), and Sun Country Airlines (SNCY) present the most attractive valuations. However, the firm maintains an Underperform rating on JetBlue Airways (NASDAQ:JBLU), citing relatively high valuations.
InvestingPro Insights
As Delta Air Lines navigates through the competitive landscape of the airline industry, real-time data and insights become crucial for investors looking to make informed decisions. According to InvestingPro, Delta Air Lines boasts a high shareholder yield, indicating a commitment to returning value to its investors. This is complemented by a low earnings multiple, with a P/E ratio of just 6.12, suggesting that the stock may be undervalued compared to earnings potential. Moreover, Delta's prominence as a key player in the Passenger Airlines industry is reflected in its substantial market capitalization of $29.94B USD and solid revenue growth of 14.76% over the last twelve months as of Q1 2023.
InvestingPro Tips highlight Delta's strong return over the last three months, with a price total return of 22.49%, and an even more impressive six-month price total return of 34.06%. These figures underscore the company's recent market performance, which aligns with Wolfe Research's positive outlook and price target adjustment. Additionally, analysts predict Delta will remain profitable this year, a sentiment supported by the company's profitability over the last twelve months.
For investors seeking a deeper analysis, there are 6 additional InvestingPro Tips available at https://www.investing.com/pro/DAL. To gain access to these insights and more, use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, unlocking a wealth of data and expert analysis to guide investment decisions.
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