We continue to be optimistic about the long-term prospects of our broadly diversified portfolios of what we believe to be undervalued stocks, notes value investor John Buckingham, money manager and editor of The Prudent Speculator.
October has often been a scary month, and we still think that Corporate America will be cautious in comments regarding the outlook for sales and earnings as Q3 reporting season kicks off this week, but we like the extraordinarily low interest rate environment, the generally healthy balance sheets and income statements for our companies, the modestly growing U.S. economy and the mostly friendly Federal Reserve.
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We offer an update on one of our favorite airline stocks, which was out with Q3 results. Delta Air Lines (DAL) reported Q3 earnings of $2.32 per share, just above the top end of management guidance, and just ahead of the $2.26 expected by analysts.
The company met its full-year free cash flow target in the quarter of $4 billion, while management affirmed its commitment to return approximately $3 billion back to shareholders through dividends and stock buybacks, returning $468 million in Q3.
The company continues to grow its premium product ticket revenue, improving 9% year over year. Premium products and non-ticket sources now make up over half of Delta’s revenue. Lower cargo revenue and third-party refinery sales were detractors.
In an announcement of a recent American Express contract renewal, CEO Ed Bastian stated, “Our recent contract renewal provided diverse, high-margin revenue stream that we expect to grow to nearly $7 billion by 2023 with further growth through the end of the decade.”
Mr. Bastian also highlighted the recent partnership with LATAM Airlines. He added, “The agreement adds geographic diversity in a fast-growing continent, adding 100 new destinations to our map and significantly improving our position in South America. Once approved, our proposed JV will move Delta from a current #4 position in South America to a combined #1 position. We expect this partnership to translate to $1 billion in new annual revenue over the next 5 years and improve returns in the Latin entity.”
The company continues to grow and become a more efficient operator, but rising costs remain in focus. Delta hired staff to accommodate higher volume, gave raises to existing employees and incurred costs to its pension plan in the quarter.
We think the strategy Delta has in place to expand its reach and woo premium customers is working, although we will continue to remain watchful of any excess capacity growth. With recent pressure on shares due to cost concerns, the world’s most valuable airline trades at 7.4 times next 12-month earnings expectations and yields 3.0%. Our target price for DAL is $78.
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