Up 46%, Is Delta Air Lines Stock a Buy?

Delta Air Lines (DAL 0.08%) stock is up 62% over the last year and 46% since the beginning of 2023. The stunning stock move comes as the company has overcome a wall of worry over the prospects for the travel industry. An expected slump in demand caused by rising interest rates hasn't happened yet.

It makes sense to frequently re-examine the case for buying or holding a stock, particularly after such a powerful move. So here's the lowdown. 

The bear case for Delta Air Lines

Although a slump in air travel hasn't appeared yet, it doesn't mean that it might not happen in the future. While the risk of a protracted slowdown in the economy hangs over nearly every stock you might buy on the market, not every stock has the risk profile of an airline in the current environment. 

Image source: Getty Images.

As you can see below, the lockdowns and travel restrictions imposed on the populace by governments had a devastating impact on airline cash flow, leading to ballooning debt levels at Delta Air Lines. Discussing the matter on the company's recent investor day, CEO Ed Bastian said Delta's current net debt was "somewhere around $19 billion to $20 billion." 

As such, any slump in demand caused by a slowdown in consumer spending would hit airlines very hard, given their debt loads and high exposure to consumer discretionary spending. 

Data by YCharts

High debt levels mean additional risk for airline stocks right now. 

The bull case for Delta Air Lines stock

On the other hand, there's a compelling case for arguing that Delta stock is still a good value. The main points of the bulls' case:

• This is not a normal economy, and passengers' desire to "catch up" on travel experiences lost due to the restrictions is creating tremendous demand for travel that should more than offset the negative impact of interest rate increases.
• The premium consumer's household wealth (the top 40% of U.S. income earners) has risen some $27 trillion since 2019 in the U.S., and Delta's refocusing on the premium customer makes it ideally placed to take advantage of their increased wealth levels.
• Delta's management expects to generate $11 billion in free cash flow (FCF) between 2023 and 2025, which the airline can use to reduce its debt load. 

In addition to these medium-term considerations, the airline has excellent earnings momentum amid a robust travel market. As such, management recently raised its full-year outlook (summarized in the table below), with Bastian noting, "The backdrop that we're in is as constructive as any I've seen in my 25 years in this business."

The table below shows the recent upgrade to the company's 2023 full-year guidance (the 2024 guidance was left unchanged). The upgrade is based on a stronger-than-expected second-quarter -- management now expects to grow revenue by 17%-18% in the second quarter compared to a prior estimate of 15%-17%. 

Data source: Delta Air Lines.

As such, everything points to strengthening momentum in Delta Air Lines' business. 

Is Delta Air Lines stock a buy?

As previously discussed, airlines are notoriously bad at generating value for equity investors, and it's tempting to walk away from buying into the airline sector. Instead, the suppliers and leasing companies are usually more attractive investments. 

That said, if you are going to buy an airline stock, then Delta's focus on the premium customer and its exposure to North America (the region expected to generate the bulk of airline profits in the near future) and its ability to reduce debt load with its cash flow make it one of the most attractive stocks in the airline sector. 

All told, given the improving momentum in the sector, Delta's stock still looks like a buy.