00:00 The travel industry is booming right now, airline passenger numbers have returned to pre-pandemic
00:05 levels. Last week Delta Airlines reported record revenues of $15.6 billion for the quarter and the
00:12 stock is up 42% year to date. At the current share price, Delta has a market cap of $30 billion,
00:19 it's got $8.5 billion of cash and investments and $18 billion of debt, so the enterprise value is
00:24 just under $40 billion. Revenue over the last 12 months is $55.8 billion which is almost 20% above
00:32 the 2019 peak. Net income however at $3 billion is still 37% below the peak. One reason is that
00:39 Delta had to take on a lot of debt during the pandemic and that is costing the company almost
00:44 a billion dollars a year in interest payments. But Delta is optimistic it can pay the debt off
00:50 over time and management gave an encouraging outlook. It thinks revenue will grow between
00:55 17-20% this year with an operating margin above 12%. Free cash flow is expected to cruise to above
01:03 $4 billion in 2024, that means Delta stock is now valued at only 8 times next year's free cash flow.
01:10 A key part of the investment case for Delta is its diversified revenue streams,
01:15 in particular its SkyMiles partnership with American Express. In an interview on CNBC,
01:21 JP Morgan analyst Jamie Baker said that close to 1% of US GDP is now being charged on co-branded
01:29 Delta American Express credit cards. This is a lucrative venture for Delta and could contribute
01:35 almost $7 billion in revenue this year, that's 63% growth since 2019. So let's assume that Delta
01:43 can grow revenue 20% this year before returning to a historical growth rate of around 4%.
01:48 Let's model that for the next 10 years and then assume it operates with a net margin rate of 8%.
01:54 In that scenario, Delta would be producing $95 billion of revenue in 10 years time with net
02:00 income around $7.6 billion. A 12 times multiple puts the valuation at $91.2 billion which works
02:07 out to an investment return of 11.8% a year. Add in some dividends and that return could increase
02:13 to around 13% a year. That might be too pessimistic but airlines are notoriously complex
02:19 investments. Delta's investment returns are subject to complex factors such as oil prices,
02:25 interest rates, the global economy and decarbonisation. On balance and mostly due
02:30 to its partnership with American Express, I give the stock a cautious bullish rating.
02:35 But these are my personal opinions, not financial advice and I've got no position in Delta. For
02:40 more detailed investing ideas make sure to visit our website overlookedalpha.com
Comments