DAL Rockets Upwards. But Is There Reason to Worry?

Delta Air Lines (DAL) stock climbed 2.6 % this morning. According to our metrics, the company seems overvalued at today's prices. In the below analysis, we will put Delta Air Lines's valuation in the context of its poor growth indicators and mixed market sentiment, which are also strong drivers for share price.

Delta Air Lines, Inc. provides scheduled air transportation for passengers and cargo in the United States and internationally. The large-cap Industrials company is based in Atlanta, United States and has 83,000 full time employees.

DAL Has a Higher P/E Ratio Than the Sector Average

Compared to the Industrials sector's average of 21.46, Delta Air Lines has a trailing twelve month price to earnings (P/E) ratio of -1.9 and an expected P/E ratio of 9.8. The P/E ratios are calculated by dividing the company's share price by its trailing 12 month of $-20.51 or forward earnings per share of $3.99.

Earnings represent the net profits left over after subtracting costs of goods sold, taxes, and operating costs from the company's recorded sales revenue. One way of looking at the P/E ratio is that it represents how much investors are willing to pay for every dollar's worth of the company's earnings. Since Delta Air Lines's P/E ratio is higher than its sector average of 21.46, we can deduce that the market is overvaluing the company's earnings.

Delta Air Lines Has a Positive Rate of Expected Growth

P/E ratios are limited because they don't tell us how the market is valuing the company's expected earnings growth. One way to solve this problem is to divide the current price to earnings ratio by the company's expected growth rate, which results in the price to eanrings growth, or PEG, ratio. Delta Air Lines has a negative PEG ratio of -0.5, and since the company's earnings per share are negative, we can deduce that the expected growth rate is positive. While a negative PEG ratio is never a good sign, investors may fin solace in the positive growth expectations.

DAL Has an Alarming P/B Ratio

The price to book (P/B) ratio of a company is a comparison of the company's market capitalization versus its net asset, or book value. A ratio lower than 1 tells you that the equity market is undervaluing the book value of the company's assets, and ratios higher than 1 tell you that the equity markets are overvaluing the company in terms of its assets.

Of course, a company is worth much more than its assets alone, so the focus on P/B ratio is mainly to enable investors to single out undervalued securities that offer a margin of safety. Since Delta Air Lines's P/B ratio of 51.8 is higher than its sector average of 3.7, such a margin of safety does not exist for the stock.

Delta Air Lines Is Not a Profitable Business

If you are looking to make DAL a long term investment, its weak margins may give you cause for concern. As you can see from the below, the company is generally losing money on each sale it makes. That being said, stock prices in the short term can be independent of a company's margins, and Delta Air Lines's management may be able to make the business profitable in the future.

Delta Air Lines's Gross Margins

Date Reported Revenue ($ MM) Cost of Revenue ($ MM) Gross Margins (%) YoY Growth (%)
2021-12-31 29,899 30,078 -0.6 98.41
2020-12-31 17,095 23,546 -37.74 -247.54
2019-12-31 47,007 34,982 25.58 n/a

Delta Air Lines's Operating Margins

Date Reported Total Revenue ($ MM) Operating Expenses ($ MM) Operating Margins (%) YoY Growth (%)
2021-12-31 29,899 -2,046 6.24 125.1
2020-12-31 17,095 -2,201 -24.86 -276.56
2019-12-31 47,007 5,407 14.08 n/a

Delta Air Lines's cost of revenue is growing at a rate of -2.5% in contrast to -66.8% for operating expenses. Sales revenues, on the other hand, have experienced a 5.6% growth rate. As a result, the average gross margins growth is -74.6 and the average operating margins growth rate is -75.7, with coefficients of variability of 748.1% and 1360.9% respectively.

We See Mixed Market Signals Regarding DAL

Delta Air Lines has an average rating of buy and target prices ranging from $74 to $35. At its current price of $39.16, the company is trading -18.63% away from its target price of $48.13. 3.5% of the company's shares are linked to short positions, and 66.9% of the shares are owned by institutional investors.

Holder Shares Date Reported Percentage Value
Vanguard Group, Inc. (The) 69,438,914 2022-06-29 11% $2,011,645,338
Blackrock Inc. 37,469,915 2022-06-29 6% $1,085,503,437
Capital World Investors 22,144,052 2022-06-29 3% $641,513,186
Primecap Management Company 21,301,956 2022-06-29 3% $617,117,665
State Street Corporation 21,135,031 2022-06-29 3% $612,281,848
FMR, LLC 14,132,191 2022-06-29 2% $409,409,573
Geode Capital Management, LLC 12,137,252 2022-06-29 2% $351,616,190
Morgan Stanley 12,099,577 2022-06-29 2% $350,524,745
Neuberger Berman Group, LLC 11,916,398 2022-06-29 2% $345,218,050
JP Morgan Chase & Company 11,258,225 2022-06-29 2% $326,150,778
The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.