Delta Air Lines Inc. (DAL, Financial) operates in the airline industry, which is comprised of companies engaged in air transportation of passengers. While there are three categories in the industry — international, domestic and regional carriers — Delta provides scheduled air transportation for passengers and cargo in the U.S. and internationally and operates through two segments, airline and refinery.
The industry
The entire industry faces a huge risk, called terrorism. But there are other, more certain risks: declining trade barriers, little pricing power in Europe and the U.S., fuel prices that add uncertainty and costs associated with employees.
The company
The company reported better-than-expected earnings for the fourth quarter but fell short on revenue. It posted EPS of $1.25 per share on revenues of $9.5 billion. Earnings were above analysts' expectations, while revenue was under by $0.11 billion.
Although the stock lost 15% year to date, traffic demand could improve because of a recovery in the U.S. Moreover, Delta completed its merger integration, which will likely lead to more free cash generation, which should help to continue reducing debt ($6.7 billion at the end of 2015 versus $15.0 billion at the end of 2010).
The air transportation company has maintained its projections from analysts in recent days. Analysts at Credit Suisse, Stifel Nicolaus and Morgan Stanley have reiterated their ratings, while analysts at JPMorgan Chase & Co. lowered their price target to $66 from $74, giving 31% upside potential from the last close.
Good and bad signs
Among the positive signs, the company’s operating margin is expanding with a Piotroski F-Score of 7, which indicates a very healthy situation. However, the stock price is close to a 10-year high and makes the P/S ratio close to a 10-year maximum of 1.06x.
Hedge fund positions
Delta Air Lines is one of the favorite airline stocks among hedge funds. The largest shareholder of the company was Lansdowne Partners, with 26.06 million shares at the end of December. David Tepper (Trades, Portfolio) is betting on the stock, having disclosed a stake containing 7.32 million shares at the end of the fourth quarter. Moreover, Jim Simons (Trades, Portfolio) initiated a new position in the stock with 59,400 shares in the last quarter of 2015, as well as Louis Moore Bacon (Trades, Portfolio) with a new position of 40,687 shares.
Final comment
Although the global economy is weaker than previously projected and some people think this industry has poor returns because of its cyclical behavior, this stock can achieve good performance in the current year, principally because it has performed well in every quarter in the past six years with a good business model.
Disclosure: Omar Venerio holds no position in any stocks mentioned.
