Asset Management & Market Research

Barron's piece supports Fusion's call on the airlines

On Friday, Kevin Lane posted a piece on the blog, Airlines set for take off ? The next day, in their weekend edition, Barron’s ran a piece that confirms our constructive thesis, in which they took a look at Delta Air Lines (DAL; FusionIQ-rated Buy; Technical Score 95). Here are some of the salient points made by Barron’s Avi Salzman.

  • A long period of turbulence in the airline industry is ending. U.S. carriers are both larger, after a spate of mergers, and smaller, now that they are cutting costs, offering fewer flights, and lugging around much less debt.
  • There is an old and mostly truthful saying on Wall Street about airline shares: They are stocks to rent, not own. For the first time in two decades, U.S. airlines appear to be on solid financial footing, and investors can buy with near certainty that the shares will remain aloft. Gone is the price cutting that destroyed profits in the name of market share, and some analysts now see the stocks as a long-term investment.
  • “There have been times in the U.S. airline industry when we felt the hobbyists were in charge,” says Jamie Baker, an analyst at JPMorgan Chase. “They have been replaced by individuals far more focused on return-generation.”
  • All of the surviving legacy airlines look poised to fly higher in coming years; but DAL might be best positioned. Shares of the Atlanta-based carrier are up  62% in the past 12 months, to a recent $12.98, and could keep climbing as profit growth accelerates.
  • Delta’s own return to profitability began in 2010, when the company netted $1.71 a share. It earned $1.41 in 2011, and likely will report income of $1.5 billion, or $1.82 a share, for 2012, on revenue of $36.6 billion. This year, analysts see a 38% gain in earnings, after last year’s estimated 29% advance.
  • Since emerging from bankruptcy court, Delta has guarded its cash and focused on paying down debt. Net debt, or debt and lease obligations minus cash and equivalents, fell to $11.8 billion at the end of 2012, from $17 billion in 2009. Management expects to cut net debt to $10 billion this year.
  • Passenger revenue per available seat mile has edged up to 14 cents from 12 cents two years ago. Profit margins of 7%, based on earnings before interest and taxes, are well ahead of the competition’s, and poised to rise to 8.1% in the 12 months ending Sept. 30.
  • One big knock on Delta is its pension obligation, which was underfunded by $11.5 billion at the end of 2011. Add other postretirement benefits and the shortfall rises to $14.1 billion. But because of federal legislation, the pension doesn’t need to be fully funded until 2031; Delta’s obligation in the next five years is about $700 million annually. The value of its obligation depends on interest rates. If they rise, it could fall considerably.
  • DAL trades for just 5.2 times this year’s expected earnings of $2.52 a share, well below the price/earnings multiples of competitors such as United Continental (UAL), Southwest Airlines (LUV), and JetBlue (JBLU). As earnings rise, the company could merit a richer valuation from investors, lifting its shares as high as $18.

 

Below we look @ DAL’s weekly chart.  As seen shares recently took out a multi-year down sloping resistance band (orange lines and arrows) as well as near $ 12.00 (red line).  This technical breakout when accompanied by the above mentioned catalysts gives lift to the idea that DAL shares may have turned the corner here.  The average analyst target on DAL lies near $ 16.00 and coincides with our technical target.  We would buy here and on pullbacks towards the mid $ 12.00′s.

DAL

 

To read Kevin’s piece from Friday, please click the following:

http://www.fusionmarketsite.com/?p=2086

 



Author: Kevin Lane

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