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Why Delta's Stock Price Could Soar

Delta Air Lines, Inc. (NYSE:DAL) has a low valuation and an improving financial outlook that suggest it offers investment appeal.

The premium airline is investing in improving the customer experience, while its expansion projects could enhance its competitive position in fast-growing markets.

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An improving customer experience

The company increased the pay of its ground employees and flight attendants by 4% in the third quarter. This could boost its staff morale and improve the experience of its customers.

In addition, Delta has recorded high levels of flight reliability in its current fiscal year that included 123 days without a cancelation. This represents a 23% improvement over its record from the previous fiscal year.

The airline's high level of reliability contributed to a five-point improvement in its net promoter score in the third quarter when compared to the same period of the previous year. Its score could increase further over the medium term, as the company plans to invest in upgraded cabin interiors. Its high customer satisfaction levels may present an opportunity for the business to raise its prices over the long run, since consumers may be willing to pay more for a superior experience compared to its rivals.

Expansion prospects

The company entered into a new strategic partnership in the third quarter with LATAM Airlines. The agreement adds 100 new destinations to Delta's offerings and improves its market position in South America. It will become the combined biggest airline operator in South America, which is a significant improvement on its previous fourth place position by market share.

The partnership increases Delta's diversity and reduces its reliance on existing markets. The company expects the deal to deliver $1 billion in new annual revenue for the business over the next five years as a result of the growth prospects of the region. This could catalyze the company's profitability and merit a higher stock market valuation for the business.

Loyalty

Delta renewed its contract with American Express (NYSE:AXP) in the current fiscal year. This provides it with a high-margin growth opportunity that the company anticipates will grow to $7 billion in annual revenue over the next four years.

The company's relaunch of its SkyMiles American Express Card portfolio in the third quarter offers greater scope for its customers to earn rewards. It also provides a range of further benefits that could make Delta's loyalty program more attractive to a wider range of consumers. Its refreshed loyalty program could increase the size of its economic moat, and provide deeper cross-selling opportunities that boost its sales performance in the long run.

Potential threats

The company experienced weakness in its Pacific segment in the third quarter, with its revenue declining compared to the same period of the prior year. The performance of its Pacific division was negatively impacted by tariffs placed on the automotive and manufacturing sectors. They led to a decline in corporate travel, as well as a fall in leisure demand to and from China. This trend may continue in the short run as a result of the ongoing trade war between the US and China.

In response, Delta is continuing to diversify its business. For example, around 52% of its revenue is generated by non-ticket sources, such as its premium products and its loyalty program. It expects its revenue from non-ticket sources to rise as a result of plans to modernize its fleet, which could lead to an improved ability for it to sell premium products. Additionally, the company expects its fourth quarter unit costs to decline 1% due to a drop in fuel prices. This could partially offset weakness in its Pacific segment over the near term.

Outlook

Analysts forecast that Delta will produce a rise in its earnings per share of 2% in fiscal 2020. Its price-earnings ratio of 8 suggests that it could offer good value for money based on its long-term growth potential.

Disclosure: the author has no position in any stocks mentioned.

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This article first appeared on GuruFocus.