I believe the market is pricing Delta Air Lines(NYSE: DAL) stock based on outdated assumptions that undervalue it. Consequently, there’s an opportunity for value investors to buy into a stock that could provide exceptional returns over the next decade, not least because it operates in a fundamentally different way within an industry that has also undergone significant improvements. Here’s why.
To build a solid investment case for a stock, it’s essential to understand the nuances of its valuation. It’s easy to point to the company’s price-to-earnings ratio (P/E) and quickly conclude that Delta is an astounding value stock. After all, Wall Street analysts expect earnings per share of $5.88 in 2025 and then $7.26 in 2026. These figures put Delta on a P/E of 11.8 times earnings in 2025 and 9.6 times earnings in 2026.
Those valuations are highly attractive, but they don’t tell the whole picture. In reality, Delta trades on a low earnings multiple for two reasons:
The company ended the third quarter with adjusted net debt of $15.6 billion, compared to a current market cap of $45.4 billion.
The airline industry has historically been highly cyclical, with significant fluctuations in profitability, which can be particularly hazardous for companies with substantial debt loads.
These are the key reasons why the stock trades at a relatively low valuation on a headline basis; however, for a multitude of reasons, the fears behind it may prove unfounded.
The key question is the degree of confidence you have in Delta’s ability to sustainably generate the earnings and the free cash flow necessary to pay down debt. Wall Street expects Delta to generate FCF of $3.4 billion in 2025, followed by $3.9 billion in 2026 and $4.4 billion in 2027, but it’s the degree of confidence you have in these projections that really matters. I think that confidence should be relatively high because Delta and the industry are operating differently from what they have done previously.
Image source: Getty Images.
Booms and busts mark the airline industry’s history due to its sensitivity to the economy and the traditional reaction of airlines in maintaining capacity during slowdowns. Unfortunately, this has led to severe ticket pricing competition, bankruptcies, and slumping profits.
However, for these reasons, Delta’s prospects are much better than they have been before:
During the two slowdowns in the summer of 2024 and spring of 2026, the airline industry, including Delta, acted in a disciplined manner by reducing route capacity where necessary and holding back on capacity expansion plans.
Delta’s increasing focus on its premium cabin (its highest-margin product, and management believes its premium cabin revenue will surpass main cabin revenue in 2027) and highly successful loyalty programs are differentiating its revenue streams.
The co-branded credit card with American Express also diversifies its revenue, and it continues to grow, bringing in remuneration for Delta, with $8 billion expected in 2025 on the way to a target of $10 billion. For reference, Delta is expected to generate overall revenue of $63.2 billion in 2025.
Rising airport and labor costs are having a disproportionate impact on low-cost carriers than network carriers like Delta, because their increases make their (low-cost carriers) ticket prices relatively much higher.
Image source: Getty Images.
Another, often missed point is that Delta continues to “unbundle” its offerings (main and premium cabin), meaning that it’s removing previously bundled perks that were included in the ticket price (seat choice, baggage allowances, lounge access, etc.) This enables it to offer various pricing options and additional revenue-generating services. It also means Delta can better compete with lower-cost carriers with stripped-down ticket options in the main cabin.
All told, the combination of revenue diversification, more stable revenue streams from loyal premium customers, and co-branded credit cards, alongside an industry behaving in a more disciplined manner than in the past, means investors can have a relatively high degree of confidence in Delta’s ability to ride out slowdowns.
The industry will inevitably have peaks and troughs. Still, in Delta’s case, the downside is significantly mitigated by its business strategy, and the company’s valuation doesn’t reflect the new reality in its business or the airline industry at large.
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American Express is an advertising partner of Motley Fool Money. Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends Delta Air Lines. The Motley Fool has a disclosure policy.
