Analyst: Delta Air Lines Deserves A Higher Valuation

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. 

The Analyst

Morgan Stanley's Rajeev Lalwani maintains an Overweight rating on Delta Air Lines' stock with a price target lifted from $66 to $72.

The Thesis

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. 

Price Action

Shares of Delta Air Lines were trading up more than 1 percent at the time of publication Friday. 

Related Links:

'Our Economic Outlook For The Year Is Strong,' Delta CEO Says After Q1 Print

Travel Stocks And The Tourism Industry: Investing As The Market Boom Continues

Market News and Data brought to you by Benzinga APIs
Comments
Loading...
date
ticker
name
Price Target
Upside/Downside
Recommendation
Firm
Posted In: Analyst ColorPrice TargetReiterationTravelAnalyst RatingsGeneralAirlinersMorgan StanleyRajeev Lalwani
Benzinga simplifies the market for smarter investing

Trade confidently with insights and alerts from analyst ratings, free reports and breaking news that affects the stocks you care about.

Join Now: Free!