The case for incremental bullishness on Delta Air Lines, Inc. (NYSE: DAL) is partly due to an unfair valuation assigned to its stock, according to Morgan Stanley.
Morgan Stanley's Rajeev Lalwani maintains an Overweight rating on Delta Air Lines' stock with a price target lifted from $66 to $72.
Delta's stock is trading at around 8x 2019 consensus EPS, which is "just too low," Lalwani said in a Friday report.
A more appropriate multiple is closer to 11x, and it's justified based on trading patterns seen over the past few years, the analyst said. U.S. airliners have traded at 60-80 percent of the broader market multiple, and the S&P 500 index is trading at around 16x 2019 consensus EPS, Lalwani said. This would imply a valuation range of 9x on the lower end and 13x on the higher end.
Delta' stock warrants a multiple at the higher end of the 9x to 13x range for the following reasons, the analyst said:
- Expectations for margins to be 1 to 2 points above the mean through 2020.
- A free cash flow yield estimate of 10 to 12 percent in 2018 and 2019, which is "well in excess" of peers.
- An investment-grade balance sheet.
- Expectations for 15-percent EPS CAGR through 2020.
An 11x multiple on 2019 estimates is "about right," which implies a price target of $72, Lalwani said.
Shares of Delta Air Lines were trading up more than 1 percent at the time of publication Friday.
© 2022 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
Ad Disclosure: The rate information is obtained by Bankrate from the listed institutions. Bankrate cannot guaranty the accuracy or availability of any rates shown above. Institutions may have different rates on their own websites than those posted on Bankrate.com. The listings that appear on this page are from companies from which this website receives compensation, which may impact how, where, and in what order products appear. This table does not include all companies or all available products.
All rates are subject to change without notice and may vary depending on location. These quotes are from banks, thrifts, and credit unions, some of whom have paid for a link to their own Web site where you can find additional information. Those with a paid link are our Advertisers. Those without a paid link are listings we obtain to improve the consumer shopping experience and are not Advertisers. To receive the Bankrate.com rate from an Advertiser, please identify yourself as a Bankrate customer. Bank and thrift deposits are insured by the Federal Deposit Insurance Corp. Credit union deposits are insured by the National Credit Union Administration.
Consumer Satisfaction: Bankrate attempts to verify the accuracy and availability of its Advertisers' terms through its quality assurance process and requires Advertisers to agree to our Terms and Conditions and to adhere to our Quality Control Program. If you believe that you have received an inaccurate quote or are otherwise not satisfied with the services provided to you by the institution you choose, please click here.
Rate collection and criteria: Click here for more information on rate collection and criteria.