The airline industry has been on top of its game in recent years, and both Delta Air Lines (DAL +0.67%) and United Continental Holdings (UAL 0.04%) have come a long way from past episodes of bankruptcy and massive losses. However, many investors fear that the airline giants could face stronger headwinds, and their share prices now reflect those uncertainties.
From a traditional value perspective, both Delta and United look like good candidates for value investors, with trailing earnings multiples that are well below the market average. Yet when you look more deeply into these two stocks, Delta has some advantages over United that become more obvious upon further reflection. Here, you'll learn about three reasons why Delta's a better value stock than United right now.
1. Despite better performance, Delta is just as cheap
Delta and United have seen their share prices diverge in the past year. Delta is up 13% since January 2017, while United has fallen 11%.
Ordinarily, you'd expect for that kind of disparity to result in a higher valuation for the better performer. That's indeed the case when you look at Delta and United from a past-earnings perspective, with Delta trading at 11 times trailing earnings while United fetches a multiple of about 9.5.
Image source: Delta Air Lines.
But the fairer way to look at valuation incorporates the future glideslope of a company's earnings, and Delta has better growth prospects for the immediate future. Based on consensus expectations for what the two airlines are likely to earn in 2018, both United and Delta feature forward earnings multiples in the neighborhood of 9. For a stock with upward momentum to enjoy good valuations as well is unusual, and it sets Delta apart in this case.
2. Delta pays a dividend
For a long time, most airlines paid little or nothing in dividends. Their need for expensive capital spending and frequent failures to earn a profit combined to make dividends unrealistic. But with the advent of consistent profitability, more airlines have been able to join the dividend bandwagon. Unfortunately, United hasn't been one of them, but Delta has.
In fact, Delta now has an impressive track record with its dividend payouts. Since 2014, the company has raised its dividend by roughly 50% for four straight years. That has quickly produced an above-average yield of 2.2% for the airline, making it an even better buy for value investors who like the stability and income that dividends provide.
3. Delta's fundamental prospects look better
Finally, Delta looks like it has its strategic vision more fully fleshed out than United. After a couple of years of falling unit revenue, the airline looks poised to see growth in 2018. Tax reform laws will also give Delta a big reward because it stands to benefit dramatically from reductions in corporate tax rates. Also, more favorable rules for getting tax deductions for capital spending should help the airline giant immensely, given the massive aircraft deliveries that it's expecting in the years ahead. Rising fuel costs will be a potential headwind, and Delta will have to work hard to keep the expenses that it can control in line. Nevertheless, a strong following among business travelers makes Delta attractive for the future.
United Continental, on the other hand, seems to be struggling. Earnings have been strong, but investors reacted negatively to news that the airline intends to be increasingly aggressive in trying to grow its capacity going forward. United wants to boost capacity by 4% to 6% in 2018, and it's already building in the erosion in margins that will be the natural result of making more flights and seats available. Of more immediate concern was recent guidance for minimal gains in passenger revenue per available seat mile for the first quarter of 2018, suggesting that United might end up falling behind if Delta and other rivals are able to build up momentum to start the year.
For all of these reasons, Delta Air Lines looks like a better value than United Continental Holdings at these levels. Both airlines have opportunities for growth and face challenges, but Delta is in a stronger position to respond to changing industry conditions and plot a course forward.
