Sarah Ketterer (Trades, Portfolio) is the chief executive officer of Causeway Capital since June 2001. Her firm manages more than $15 billion in assets. In terms of investment philosophy, Sarah Ketterer (Trades, Portfolio) and her team begin with a screen of both large and mid-sized. Their screens are applied to approximately 3,400 companies and use quantitative and value-oriented methods to find prospective stocks that meet their criteria for further analysis. Each stock also receives a "risk score" based on the additional volatility/risk it adds to the portfolio. Their final portfolio is built from those stocks with the highest expected risk-adjusted return. It will typically have 60-80 stocks that have a lower price/earnings ratio and higher dividend yield than the market.
Sarah recently initiated a position in Delta Airlines (DAL, Financial) by buying 2,280,253 shares. Last month, Delta Airlines reported strong results with reported traffic increase of 3.6% and operating margin improvement of 90 bps. Going forward, Delta expects operating margin of 16% to 18% next quarter, assuming fuel price remains between $2.35-$2.40.
Delta is one of the cheapest S&P 500 stock trading at a forward PE of just 8 times. Delta is one of the best airlines in terms of operational excellence. In 2014, the company had 95 days of no mainline cancellations, a completion factor of 99.8% and an on time rate of 85%. This excellent operational performance translates into revenue premium as customers are willing to pay for high quality services.
The company's operational excellence coupled with the falling crude price is leading to improved profitability. Delta is judicially using its cash flow from improved profitability. The company has paid down $2.1 bn in debt last year and its net debt level at year end was $7.3 bn. This translates in $200 mn of annual interest savings. In addition to bringing down its debt levels, the company also repurchased $1.35 bn in stocks and paid out $251 mn in dividends last year.
Going forward, the company expects a significant increase in pre-tax profit in 2015 from fuel cost savings and the benefits of initiatives it is taking to increase its topline. The company plans to bring down its debt levels to $6 billion by the end of 2016 and $4 billion by2017. Delta earlier announced its plans to significantly accelerate its capital returns and spend a minimum of $1.5 bn in dividends and buy backs in 2015. Now it seems like these targets would be met by the middle of this year, and the company’s actual capital return through buybacks and dividends in 2015 will be much higher.
Delta's shares are trading at 10.25 times and 8.23 times FY2015 and FY2016 consensus EPS estimates, respectively. Its forward annual dividend yield is 0.80%. Out of 18 analyst covering the company 16 are bullish and have buy recommendation, and two have hold ratings. Imperial Capital analyst Bob McAdoo believe that the company could trade at a multiple in line with S&P 500 Industrials average. In a research note sent after the company's investor day presentation last year, he commented:
“Investor Day commentary outlines long-term operating goals and DAL’s belief, with which we concur, that the company should trade at multiples similar to other S&P Industrials. Within its Investor Day presentation on 12/11/14, Delta outlined its long-term operating and balance sheet goals. The company is targeting annual EPS growth of between 10% and 15%, consistent with consensus growth of 12% for other S&P 500 industrial companies. Operating margins should continue to be 11-14%, though we believe lower fuel prices could drive significantly higher operating margins in 2015.”
Given the company's operational excellence, history of returning cash to shareholders, fuel cost tailwinds and attractive valuation, I recommend buying the stock.
