uploads///Valuation

How Delta’s Valuation Multiple Stacks Up Compared to Peers

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Jul. 18 2017, Updated 10:37 a.m. ET

Current valuation

Delta Air Lines (DAL) is currently valued at 5.8x its forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple. This valuation is lower than its average valuation since DAL’s listing in November 2008 of 5.4x.

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Peer comparison

Both Southwest Airlines (LUV) and Alaska Air Group (ALK) are trading at industry high valuations of 6.8x, followed by American Airlines (AAL) at 6.6x. Spirit Airlines (SAVE) is trading at 6.3x, followed by JetBlue Airways (JBLU) at 6.0x and United Continental (UAL) at 5.4x.

All legacy carriers are expected to record a decline in their EBITDA for 2017. AAL’s EBITDA is expected to fall 1.1%, DAL’s is expected to fall 4.3%, and UAL’s is expected to fall 9.0%. Niche player ALK’s EBITDA is expected to grow at 14.5%. However, this growth would mostly be inorganic. Southwest’s EBITDA is expected to fall 3.3%, while JBLU’s EBITDA is expected to fall 7.5%. Spirit Airlines is the only carrier expected to record EBITDA growth.

Our analysis

Valuation multiples depend on investors’ perception of how risky a particular stock is and what are they willing to pay for it.

Delta’s leverage reduction, improving margins, and free cash flow generation make it a less risky stock in comparison to peers. Short-term risks to valuation are from declining unit revenues and margins. A sudden rise in fuel cost is another significant risk to airlines’ valuations.

In the long term, valuation multiples will be impacted by industry fundamentals, which are affected by the country’s economic growth. The airline industry expects to see higher travel demand in the future.

Investors can gain exposure to Delta Air Lines stock by investing in the First Trust Industrials/Producer Durables AlphaDEX Fund (FXR), which invests 1.9% of its portfolio in DAL.

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