The investment case for the stock is based on understanding how management has fundamentally restructured the airline’s business model.
The airline’s bonuses, loyalty, co-branded credits and differentiated pricing strategies are securing its long-term revenue streams.
The industry, and this airline, in particular, is unlikely to be as cyclical as it was in previous decades.
10 stocks we like better than Delta Air Lines ›
I think the market is setting prices. Delta Airlines(NYSE: DAL) actions based on outdated assumptions that undervalue them. Consequently, there is an opportunity for value investors to buy 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 seen significant improvements. Here’s why.
To build a solid investment case for a stock, it is essential to understand the nuances of its valuation. It’s easy to point to the company’s price-to-earnings (P/E) ratio and quickly conclude that Delta is an amazing 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 very attractive, but they don’t reflect the full picture. Delta actually trades at 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 capitalization of $45.4 billion.
Historically, the airline industry has been very cyclical, with significant fluctuations in profitability, which can be particularly dangerous for companies with significant debt loads.
These are the key reasons why the stock is trading at a relatively low valuation overall; However, for a multitude of reasons, the fears behind this may turn out to be unfounded.
The key question is how confident we are in Delta’s ability to sustainably generate the earnings and free cash flow needed to service 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 what really matters is how confident you are in these projections. I think confidence should be relatively high because Delta and the industry are operating differently than they have before.
Image source: Getty Images.
Booms and busts mark the history of the airline industry because of its sensitivity to the economy and airlines’ traditional reaction to maintaining capacity during downturns. Unfortunately, this has led to severe ticket price competition, bankruptcies and falling profits.
However, for these reasons, Delta’s prospects are much better than before:
During the two slowdowns of summer 2024 and spring 2026, the airline industry, including Delta, acted in a disciplined manner by reducing route capacity when necessary and putting the brakes 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 by 2027) and highly successful loyalty programs are differentiating its revenue streams.
The co-branded credit card with American Express It also diversifies its revenue and continues to grow, providing compensation to Delta, with a forecast of $8 billion in 2025, on the way to a goal of $10 billion. For reference, Delta is expected to generate total revenue of $63.2 billion in 2025.
Rising airport and labor costs are having a disproportionate impact on low-cost carriers than on network carriers like Delta, because their increases make their (low-cost carriers’) ticket prices relatively much higher.
Image source: Getty Images.
Another point that is often overlooked is that Delta continues to “unbundle” its offerings (main and premium cabin), meaning it is eliminating previously bundled benefits that were included in the ticket price (seat choice, baggage allowances, lounge access, etc.). This allows you to offer various pricing options and additional revenue-generating services. It also means Delta can better compete with lower-cost airlines with simplified ticketing 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, along with an industry that is 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 weather downturns.
The industry will inevitably have ups and downs. Still, in Delta’s case, the downside is significantly mitigated by its business strategy, and the company’s valuation does not reflect the new reality of its business or the airline industry in general.
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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.
Here Are My Best Value Stocks to Buy in 2026 Originally Posted by The Motley Fool
