John Burbank (Trades, Portfolio) is the chief investment officer of Passport Capital LLC, the global investment firm he founded in 2000. The firm now manages a portfolio worth more than $3.5 billion. The San Francisco-based firm employs top-down macroeconomics to achieve risk-adjusted returns.
Last quarter, Burbank increased his position in Delta Airlines (DAL, Financial) by buying 1,581,549 shares. As of June 30, he was holding 1,590,668 shares of the company.
Delta is one of the cheapest S&P 500 stocks, trading at a forward PE of just 8.5. Delta is also 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 a 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 paid down $2.1 billion in debt last year, and its net debt level at year-end was $7.3 billion. This translates in $200 million of annual interest savings. In addition to bringing down its debt levels, the company also repurchased $1.35 billion in stocks and paid out $251 million in dividends last year.
Going forward, the company expects a significant increase in pretax profit in 2015 from fuel cost savings and the benefits of initiatives it is taking to increase its top line. The company plans to bring down its debt levels to $6 billion by the end of 2016 and $4 billion by 2017. Delta has earlier announced its plans to significantly accelerate its capital returns and spend a minimum of $1.5 billion in dividends and buybacks in 2015. It has already purchased $1 billion in stock, and it is likely that the company’s actual capital return through buybacks and dividends in 2015 will be much higher than its guidance.
Delta's shares are trading at 10.37 times FY2015Â and 8.52 times FY2016Â consensus EPS estimates. Its forward annual dividend yield is 0.80%.Â
Given the company's operational excellence, history of returning cash to shareholders, fuel cost tailwinds and attractive valuation, I recommend buying the stock.
