Just because you’re undervalued doesn’t mean you’re heading higher.
Shareholders of Delta Air Lines, Inc. (NYSE:DAL), including this writer, know this to be true. While the airline’s earnings have been rising this year, and should easily eclipse last year’s $4.5 billion profit, the stock has gone nowhere but down, 21% for the year.
The trend continued during the September quarter. Delta reported pre-tax income of $1.9 billion on revenue of $10.483 billion — although taxes cut net income to $1.259 billion, $1.69 per fully diluted share. Still, that’s more than it earned for all of 2012, on just slightly more revenue. Those look like pretty good numbers.
Tell that to the street.
While the stock rose in early trade on Oct. 19, the price-to-earnings multiple is still stuck in the mid-single digits, at about 6.5. This is auto company territory. When stocks don’t respond to good news, moreover, it’s easily spun as bad news. As it was here.
Delta Is a Good Airline
In general, Delta is a well-run airline, having recently executed the succession of Edward Bastian, replacing Richard Anderson, and building a respected team of executives under him.
You wouldn’t know that from reading the news, which makes it seem like Delta is a disaster.
A flight attendant allegedly didn’t believe that an attractive black woman was a doctor. Airfares are said to be falling and expenses rising. Insiders continue to sell shares for retirement, which is taken to mean they’re pessimistic. Sanford Bernstein calls the stock just a “market perform.”
If you have merely held Delta stock over five years, however, you’re in very good shape. Since late 2011 it’s up 363%, and the dividend has more than tripled, having been initiated in late 2013 at 6 cents per share and standing now at 20 cents. That rate is very, very affordable, often covered eight to 10 times over by earnings.
What DAL Stock Has Been Doing
Delta has mostly used its good fortune on its balance sheet. Long-term debt has been cut from over $11 billion at the end of 2012 to $6.7 billion at the end of 2015, and it fell below $6.5 billion in the most recent quarter. Operating cash flow, meanwhile, has been huge, coming in at $6 billion for the current quarter after hitting $8 billion for all of 2015.
This means that DAL stock is now in a very good position to do some plane shopping. The current fleet is 17 years old, on average, compared with less than 12 years for rival Southwest Airlines Co (NYSE:LUV). Delta uses aircraft from both Airbus and Boeing Co (NYSE:BA), and should be in good position to bargain for new mid-range jets. That would lower its fuel bills, which it hedged years ago by buying a refinery in 2012.
In other words, if there is going to be an airfare price war, don’t expect Delta to lose it.
The Bottom Line
I made a mistake. I got in late to Delta Air Lines. I took a very small position in the middle of 2015, and I’m underwater on the shares over one year later. That includes reinvested dividends.
Conventional wisdom would say dump it. Just because a stock is undervalued doesn’t mean it can’t stay that way, as any Ford Motor Company (NYSE:F) shareholder will tell you.
But personally, I’m hanging in there, which I guess makes it a good buy here. Investors don’t dump well-run companies just because traders are doing it.
Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in DAL.
