Investors seem to be valuing the airlines as though a recession is certain. From its high of last year, Delta Air Lines (DAL), is down about 44%.
Currently, Delta's total enterprise value is right around the level where it bottomed in 2009, despite being in much better shape than it was at that time.
Delta, which traces it roots back to a crop dusting operation in Georgia in 1924, is now one of the largest airlines in the world.
In 2005, the firm was forced into bankruptcy by a heavy debt load and weak results; it emerged out of Chapter 11 in 2007 and, in 2008, it merged with Northwest Airlines.
Unlike the past when Delta (like most airlines) increased capacity and let costs creep up when times were good, the company has been very disciplined ever since coming out of Chapter 11.
Moreover, revenues have been growing nicely and show few signs of slowing. Planes are generally quite full, and Delta (again, like most competitors) has been successful at finding new revenue sources such as baggage fees and meal charges.
The company appears to be on course to earn at least $1 per share this year, and barring a collapse of the global economy, it could earn twice that next year.
Delta's finances look good, too. It substantially improved the balance sheet in Chapter 11 and has been continuing to reduce debt. Cash flow is strong� and the company is holding nearly $4 billion in cash and equivalents.
Fuel costs remain a wild card. and a sharp spike in oil prices would hurt results.
All in all, we think the market expects the worst from Delta, but we believe that expectation is too extreme.
We expect the stock to perform decently even if the economy softens considerably and to perform very well if the economy muddles through. We recommend buying DAL up to $12.
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