The airlines have been one of the cheapest sectors in the last few years and the stocks are finally soaring to new highs led by the strong numbers from Delta Air Lines (DAL). Investors need to keep in mind that this airline isn’t even seeing multiple expansion this week leaving a long runway for stock gains from here.
A couple of key catalysts are finally grabbing investor attention. First, the airlines from the quarterly report for Delta to the December traffic report from United Airlines (UAL) confirmed that positive revenue trends are sustainable. Second, the tax cuts are a big boost to the bottom line for airlines that are domestically focused.
For Delta, revenues in the final quarter of 2017 jumped over 8% partially boosted by refinery sales due to soaring oil prices. My past research focused on how the market was always too focused on slumping revenue due in part to fuel costs and not focused enough on the strong profit picture. As always, the stock market has a mind of its own.
One interesting metric to track is the revenue per share that factors in the stock buybacks that reduces the share count. Due to the cheap shares and the ability to reduce the average share count for Q4 from 737 million to 711 million shares helped push the revenue per share to new heights.
The stock was slow to follow this shift, but the suggestion from the chart is that Delta has a long rally ahead. Revenue per share jumped to $58 after including the Q4 growth that isn’t in the above numbers yet.
The other huge benefit is the reduced corporate income tax rate from the Tax Cuts and Jobs Act of 2017 bill recently approved by the U.S. government that drastically reduced the income tax rate. The lower tax rate boosts the bottom line to the tune of over $1 per share. Due partly to the strong Q4 results that included a $0.07 EPS beat, analyst estimates for 2018 have suddenly soared to over $6.75 per share.
The tax rate is dropping from 37% to a projected 23% on average, but oddly the market knew the domestic rate was about to fall as the U.S. approved a federal corporate rate of 21%. The stock has only start heading higher following the actual acknowledgement of the bottom line boost.
Still No Multiple Expansion
The reality is that the market missed the extreme valuation in Delta shares and the somewhat surprise tax cut is a sudden boost. The stock hasn’t even reached $60 yet meaning that the $5 jump this week isn’t even fully accounting for the tax savings alone.
Delta still only trades at roughly 9x forward EPS estimates. Multiple expansion hasn’t even occurred yet providing plenty of upside when this actually occurs.
The key investor takeaway is that is that Delta is finally reaching new highs after strong reports and tax savings. If anything, the stock is even cheaper now making Delta a long-term position to keep.
Disclosure: I am/we are long UAL.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.