Along with the February traffic numbers, Delta Air Lines (NYSE:DAL) reported a key stat returned to flat after an extended period of negative prints. The stock, though, shook off the improving trend with an initial decline due to the weak market.
At roughly $50, Delta Air Lines appears poised for a breakout to new highs. Is the positive data trend the key signal for new highs?
PRASM Is Key
The airline sector struggled massively over the last couple of years despite generating substantial profits. Lower oil prices helped reduce operating expenses, but it also lowered revenue metrics.
The market doesn’t like lower revenue metrics in this industry despite the fact Delta Air Lines and the other legacy airlines were flush with cash and repurchasing shares at a fast clip.
Enter the February traffic stats and Delta Air Lines has again reached passenger revenue per available seat mile (PRASM) of flat YoY after the slip in January. The key is the trend that is heading towards a positive for the rest of the year.
Delta produced the following monthly PRASM figures over the last eight months:
February 0.0% January -2.5% December 0.0% November -1.0% October -6.5% September -3.0% August -9.5% July -7.0%
The market wants more from Delta. At the time of the Q4 report in mid-January, the airline guided to a Q1 PRASM of flat to up 2%. The numbers to date suggest being flat for the quarter remains a difficult task. Still, though, the monthly trend is an investor’s friend.
One of the best slides encapsulating the airline industry are the valuation charts that Delta Air Lines provides in its presentations. The company succinctly highlights how the stock is extremely undervalued in comparison to other industrial transport stocks.
Source: Delta Air Lines Investor Day presentation
The interesting part is that Warren Buffett and Berkshire (NYSE:BRK.A) (NYSE:BRK.B) confirmed the validity of this chart. Berkshire has repeatedly loaded up on airlines in the last few months.
Remember that Berkshire famously invested in the railroads as that sector shifted towards a focus on profits. Ironically, though, the railroads led by CSX Corp. (NYSE:CSX) have soared since the above chart was created in December while Delta Air Lines has traded sideways.
Sure signs exist that CSX can improve the key operating ratio by cutting staff, including the recent workforce reduction at its headquarters, but the valuation discrepancy between the two stocks is incredible.
DAL PE Ratio (Forward 1y) data by YCharts
The key investor takeaway is that the airline sector is focused on improving revenue metrics and Delta is making progress on the goal of returning to positive PRASM. In the meantime, the stock is an exceptional bargain for investors.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.
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