Most analysts love Delta Air Lines, which has an average rating of buy. But there's reason to believe the stock may be overvalued at today's price of $36.17 per share. Let's look at the fundamentals ourselves and see if we reach a different conclusion than the analyst community.
The most common valuation metric for stocks is the trailing price to earnings (P/E) ratio. Delta Air Lines has a P/E ratio of 18.74 based on its 12 month trailing earnings per share of $1.93. Considering its future earnings estimates of $6.86 per share, the stock's forward P/E ratio is 5.27. In comparison, the average P/E ratio of the Consumer Discretionary sector is 22.33 and the average P/E ratio of the S&P 500 is 15.97.
Delta Air Lines's P/E ratio tells us how much investors are willing to pay for each dollar of the company's earnings. The problem with this metric is that it doesn't take into account the expected growth in earnings of the stock. Sometimes elevated P/E ratios can be justified by equally elevated growth expectations.
We can solve this inconsistency by dividing the company's trailing P/E ratio by its five year earnings growth estimate, which in this case gives us a 23.16 Price to Earnings Growth (PEG) ratio. Since the PEG ratio is greater than 1, the company's lofty valuation is not justified by its growth levels.
We can also compare the ratio of Delta Air Lines's market price to its book value, which gives us the price to book, or P/B ratio. A company's book value refers to its present liquidation value -- or what would be left if the company sold off all its assets and paid off all of its debts today. DAL has a P/B ratio of 4.722, with any figure close to or below one indicating a potentially undervalued company.
With most indicators pointing at a higher than average valuation with uncertain growth prospects, most analysts are either wrong about Delta Air Lines, or their research has uncovered one or more qualitative reasons to invest in the stock. For example, the strength of the management team and their plan for executing the business strategy may have convinced some analysts to give less weight to traditional quantitative factors.