Investing in Delta Airlines: A must-know company overview (Part 14 of 14)
DAL valuation
For airline companies, EV/EBITDAR (enterprise value to earnings before interest, tax, depreciation, amortization, and rent) is a better valuation metric than the P/E (price-to-earnings) ratio for two reasons.
- Airline companies generally have high debt levels. Price multiples don’t consider debt, while EV multiples do.
- Airline companies also have high leases, as aircraft can either be purchased or leased and multiples vary accordingly. EV/EBITDAR is considered after adding back lease rentals in order to make companies with different lease and ownership structures comparable.
Delta’s EV/EBITDAR is 6.6x, and it’s trading at an 8% premium to its peer average. Its forward EV/EBITDA multiple and P/E ratio are close to the peer average. As the table above shows, Delta is well ahead of its peers, with the highest margins and a forward EV/EBITDA multiple of 5.3x for a high forward EBITDA margin of 17.11% that’s justified compared to Southwest’s (LUV) forward EBITDA multiple of 5.6x for a forward EBITDA margin of 14.97%. A similar comparison for all other competitors reveals that lower multiples are coupled with lower forward margins compared to Delta. American Airlines (AAL) has a forward EBITDA multiple of 5.4x, close to Delta’s, but with a much lower forecasted EBITDA margin, at 14.07%. United’s (UAL) EBITDA margin also stands low, at 9.86% for a 4.7x EBITDA multiple. Jet Blue (JBLU), however, is slightly better, with a forward EBITDA margin of 13.98% for a 4.9x EBITDA multiple.
Moreover, with high ratings in most customer surveys, strong fundamental performance in terms of increasing operational efficiency, good cash flow generation, and a promising five-year target, Delta is well positioned to generate good returns for investors. Delta expects an operating margin between 11% and 14%, EPS (earnings per share) growth of 10% to 15% after 2014, ROIC of 15% to 18%, $6 billion in operating cash flow, $3 billion in free cash flow, and $5 billion in adjusted net debt by 2016.
Browse this series on Market Realist:
- Part 1 – Investing in Delta Airlines: A must-know company overview
- Part 2 – Delta Airline’s key operating segments and geographic segments
- Part 3 – Why Delta Airlines scores highly on customer satisfaction surveys
- Finance
- Investment Company Information
- Delta Airlines
- American Airlines