In the past, Delta Air Lines (NYSE:DAL) had a poor reputation as a slow and stodgy legacy airline. The darkest hour came in 2005, when the company filed for Chapter 11 bankruptcy. Since emerging as an independent company in 2007, Delta has rebranded and restructured a culture of excellence, achieving a reputation that has now earned it "industry-leading reliability and record customer satisfaction."

Delta will hope to wrap up a solid 2019 when it reports Q4 earnings on Jan. 14. Here's what investors need to know about Delta and expect from its earnings report.

The paradigm shift

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The past decade was nothing less than revolutionary in terms of investor sentiment toward airline stocks. All six major airline stocks ascended over 200% in the 2010s, beating the S&P 500 during one of the best bull markets in history.

In years past, even top investors like Warren Buffett criticized the cyclical nature and capital intensity of airlines. That changed in 2016 when Berkshire Hathaway purchased shares of four major airlines, one of which was Delta. Buffett then added more than 5 million shares in 2019.

A passenger plane flies over a sunset sky.

Image Source: Getty Images.

Q3 earnings and Q4 outlook

Delta reported Q3 2019 basic earnings per share (EPS) of $2.32 -- a 29% increase year over year (YOY). With the economy booming and the summer travel season in full swing, third-quarter earnings are typically one of the best for airline stocks. For Delta, it was outstanding. CEO Edward H. Bastian noted, "[W]e had [a] record summer in terms of both volumes and revenues, so all-time high revenues for us."

Most of the growth for air travel is from emerging markets, but Delta was able to increase domestic revenues by 8% in the third quarter of 2019. Basic earnings per share for the nine months ended Sept. 30, 2019 stand at $5.61 versus $4.20 from the same period in 2018, a 33% increase.

Delta is forecasting Q3 2019 EPS of $1.20 to $1.50, wrapping up 2019 guidance of $6.75 to $7.25 and a 2020 outlook of $6.75 to $7.75. Although 2020 isn't expected to have the same YOY growth as 2018 to 2019, Delta's earnings, compared to the price, make it a powerhouse value stock.

Financial analysis

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Between May 2019 and July 2019, Delta increased its quarterly dividend by 15%, fueling a decade that ended with a 570% increase to its dividend. The company's 2.5% dividend yield is the highest of all airline stocks, making Delta a competitive dividend stock, as well.

In terms of value, Delta used $468 million of its $1.43 billion in free cash flow (FCF) from 3Q 2019 for "$208 million in share repurchases and $260 million in dividends." The company expects total 2019 free cash flow to be about $4 billion and is guiding for $4 billion for 2020, as well, meaning cash flow is strong enough to cover current payouts and future dividend raises. On top of that, Delta's price to free cash flow is second only to Southwest Airlines, and its price-to-earnings (P/E) ratio sits at just 8.2, which is less than a third of the current S&P 500's P/E ratio. 

What to watch

Delta Air Lines had nothing short of a banner decade full of record breakers and improving economics for the industry as a whole. For 4Q 2019, investors should look to make sure that earnings come in between the $1.20-$1.50 range and the cash flow outlook stays where it is. Despite Delta stock's 223% surge in the 2010s, the core valuation metrics remain low, meaning Delta's stock appreciation is well deserved.

Keep in mind that the airline industry is cyclical, meaning profits could stall or drop in a slowing economy. That being said, low fuel prices and growing demand for air travel in emerging markets are two tailwinds that should persist over the long term, making Delta Air Lines a solid income and value stock to round out your portfolio.