Analyst: Delta Air Lines Deserves A Higher Valuation

The case for incremental bullishness on Delta Air Lines, Inc. (NYSE: DAL) is partly due to an unfair valuation assigned to its stock, according to Morgan Stanley. 

The Analyst

Morgan Stanley's Rajeev Lalwani maintains an Overweight rating on Delta Air Lines' stock with a price target lifted from $66 to $72.

The Thesis

Delta's stock is trading at around 8x 2019 consensus EPS, which is "just too low," Lalwani said in a Friday report.

A more appropriate multiple is closer to 11x, and it's justified based on trading patterns seen over the past few years, the analyst said. U.S. airliners have traded at 60-80 percent of the broader market multiple, and the S&P 500 index is trading at around 16x 2019 consensus EPS, Lalwani said. This would imply a valuation range of 9x on the lower end and 13x on the higher end.

Delta' stock warrants a multiple at the higher end of the 9x to 13x range for the following reasons, the analyst said:

• Expectations for margins to be 1 to 2 points above the mean through 2020.
• A free cash flow yield estimate of 10 to 12 percent in 2018 and 2019, which is "well in excess" of peers.
• An investment-grade balance sheet.
• Expectations for 15-percent EPS CAGR through 2020.

An 11x multiple on 2019 estimates is "about right," which implies a price target of $72, Lalwani said. 

Price Action

Shares of Delta Air Lines were trading up more than 1 percent at the time of publication Friday. 

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