What’s Priced into Delta’s Valuation?



Current valuation

Delta Air Lines (DAL) is currently valued at 3.57x its forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple. Delta Air Lines’ valuation is lower than its average valuation since its listing in November 2008 of 4.67x.

As can be seen from the above chart, DAL has traded close to the industry median except for short periods in 2010 and 2013.

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Peer comparison

Delta’s peers are trading at the following forward EV-to-EBITDA multiples:

  • American (AAL): 4.31x
  • United Continental (UAL): 3.06x
  • Alaska Air Group (ALK): 3.75x
  • Southwest Airlines (LUV): 4.57x
  • JetBlue (JBLU): 3.49x
  • Spirit Airlines (SAVE): 7.01x
  • Allegiant Travel (ALGT): 6.58x

The market is expecting DAL to record an EBITDA growth of 18% in the next one year. AAL’s EBITDA is expected to grow by 19%, UAL’s by -7%, ALK’s by 10%, LUV’s by 11%, JBLU’s by 10%, SAVE’s by 3%, and ALGT’s by 4%.

Our analysis

Delta Air Lines is expected to record one of the highest EBITDA growths in the coming year. As explained previously, most of this will come from margin expansion due to a reduction in hedging losses. However, this already seems to be factored into the stock price. In the short term, if fuel prices fall further and travel demand is still robust, airline stocks should do well.

The airline industry is cyclical. The fragile nature of the industry’s profitability ensures that investors tread with caution. Most airlines are now boasting about having found the key to remaining profitable across cycles. In the long term, this is what will affect valuation multiples.

If industry fundamentals deteriorate or investors’ risk appetite falls, valuation multiples can fall too. A company’s leverage will magnify the extent of share price decline, which reminds us why investors should also keep a close eye on leverage.

In the upcoming earnings release, investors need to watch out for DAL’s unit revenue guidance for 2016 and also keep an eye on the capacity utilization trends.

Delta Airlines forms ~1% of the Large Cap Growth AlphaDEX Fund (FTC).


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