It's been a strange time for airliners. Many anticipated the sector's stocks to surge this year amid reopenings, but that hasn't been the case. In fact, Delta Air Lines Inc. (DAL, Financial) has declined 4% year to date, to the dismay of its investors. However, there's a strong argument that an inflection point may have been reached and things could soon change for the better; here's why.
Earnings highlights
The American airline company strolled past its first-quarter financial performance estimates after beating its earnings target by 4 cents per share.
The company reduced its operating losses by $9 million and posted $8.2 billion in total operating revenue. The key driver behind its upbeat operating results was its third-party refinery sales that have recovered up to the 79% level, only 4% shy of pre-pandemic levels.
Furthermore, Delta generated $1.8 billion in operating cash flow and $197 million in free cash flow, which bodes well seeing as it recently committed to a cost outlay of $1.6 billion for new aircraft purchases and modifications.
The airline's balance sheet is gradually improving after pandemic-induced dents. Delta's quick ratio of 0.65 isn't ideal, but it suggests matters are improving for the company. Additionally, Delta's $12.8 billion in cash and equivalents means it's well equipped to take advantage of distressed opportunities in the airline space as well as face any future Covid-19 lockdowns.
Valuation
Delta is significantly undervalued. The stock is trading at a price-sales ratio of 0.82 and a price-to-cash flow ratio of 7.54, suggesting that the market hasn't quite priced in the company's cash and accruals just yet.
The company halted dividend payments in 2020 amid pandemic concerns and hasn't reinstated redistributions just yet. Investors seeking capital gains could actually benefit from this as there's a trade-off between dividend payments and the stock's intrinsic value. Thus, if Delta delays dividend payments further, its stock's intrinsic value will likely proliferate, subsequently creating a value gap.
Insider trading
Insider buying and selling often dictate a stock price as it reflects management's view of a company's financial prospects, which in turn spills over into market sentiment.
Insider selling was the main theme during the earlier stages of the pandemic; however, that trend has changed recently, with various directors buying back into the company.
The bottom line
Delta is primed for growth as its key value drivers have r-aligned. The stock hasn't lived up to its potential as investors have been hesitant, but its most recent earnings report suggests there's no reason to be doubtful.
