Is Delta Air Lines Stock a Buy?

Delta Air Lines (DAL 0.44%) recently released earnings and the results were excellent, checking off nearly all the items many investors look for from a company in the transportation sector. As such, the stock remains a great investment option for those seeking a long-term growth stock.

That's the overarching take on Delta. Now let's take a closer look at why this is the best airline stock to buy at the moment.

Delta ticks all the boxes

The investment case for Delta is based on a belief in the enduring nature of the recovery in commercial air travel, the airline's shift toward higher-margin premium services including its premium cabin ticket sales, and its loyalty-related revenue. In addition, investors are hoping Delta keeps costs under control and meets its full-year free-cash-flow guidance of $3 billion to $4 billion, allowing it to repay debt built up during the pandemic.

The good news is all these objectives were furthered by the company's first-quarter earnings.

Revenue and costs

A few weeks ago, Delta's management told investors that its first-quarter adjusted revenue would come in the top half of its 3%-6% guidance range, and investors weren't disappointed. Adjusted revenue growth of 6% was accompanied by a solid performance in total revenue per available seat mile (TRASM) of 19.17 cents, compared to 19.3 cents in the same quarter a year ago.

However, Delta's costs were much better than previously forecast. For example, the guidance going into the quarter called for non-fuel cost per available seat mile (CASM-Ex) to increase by 3% when the actual result was a 1.5% increase to $14.08.

The overall CASM of 20.04 cents was lower than the 21.25 reported in the same quarter last year, as the one-time pilot expenses of CASM 1.41 cents in the first quarter of 2023 didn't repeat.

The end result was a year-over-year adjusted operating margin increase from 4.5% to 5.1%.

Looking ahead to the second quarter, management expects:

• Adjusted revenue growth of 5%-7% driven by capacity growth of 6%-7%
• CASM-Ex increase of 2%
• Operating margin of 14%-15%

Given the summer traveling season's importance to Delta's full year and the impressive start to the year in the first quarter, management maintained its full-year guidance.

Image source: Getty Images.

Delta is making a shift toward premium

In addition to the excellent headline numbers, Delta continues to progress on its aim of focusing on the premium traveler. There are three line items worth focusing on regarding its revenue. First, note the strong increase in premium ticket sales. Delta President Glen Hauenstein noted on the earnings call: "We continue to put more premium seats in the mix. We believe that is one of the key drivers for us to continue to accelerate our relative performance to our industry peers."

Second, loyalty travel awards revenue (booked as customers redeem SkyMiles under its loyalty program) grew by 14%. Third, within the "other revenue" line, Delta's loyalty program revenue grew 9.5% to $795 million -- this includes miles redeemed for non-air travel, revenue from brand usage, and "obligations embedded in miles sold."

As such, Hauenstein said, "Total loyalty revenue grew 12% on continued strength in the American Express co-brand portfolio with record quarterly remuneration of $1.7 billion." Delta American Express credit cards are the key generator of miles sales. Management expects American Express' remuneration to Delta to grow to $10 billion over the long term from $6.8 billion in 2023.

Data source: Delta Air Lines SEC filings. YOY = year over year. *excludes third-party refinery sales

What it means to Delta Air Lines investors

Delta's premium ticket sales and loyalty-related revenue are growing at a faster pace than the revenue overall and much more than its main cabin revenue. This should help improve its margin profile. In addition, the growth of the SkyMiles program (targeted at younger, more affluent customers) is a plus for its credit card-related remuneration.

Image source: Getty Images.

Meanwhile, Delta continues to use its cash flow to repay debt, with $700 million repaid in the quarter and $4 billion planned for 2024.

That should bring Delta's debt-to-earnings multiples down to levels commensurate with investment-grade debt (Moody's already rates its debt as investment-grade) and given that the stock trades at 7.3 times 2024 Wall Street earnings expectations and less than 9 times 2024 free-cash-flow expectations, the stock looks an excellent value.