Delta Air Lines (DAL -2.89%) recently closed the books on a record-setting quarter. The quarter follows a successful 2023 that marked a full return to normal operations following the impacts of the COVID-19 pandemic. Like many consumer-facing businesses, Delta was forced to borrow money to stay in business thanks to pandemic- and shutdown-related pressures. Persistent inflation and economic uncertainty throughout 2022 kept the brakes on Delta's recovery, but the full-year 2023 and first-quarter 2024 results are a relief to investors who held on through the lows of 2020-2022.
Impressive 2023 full-year results
For 2023, Delta earned net income of $6.25 per share on an adjusted basis, up from $3.20 in 2022. Based on a recent closing price of $52.99 per share, the price-to-earnings ratio (P/E) was 8.48 based on trailing earnings.
P/E ratios lower than 15 are widely regarded as representing value, giving investors the opportunity to own a share of earnings at lower prices than companies with higher P/E ratios. The increased net income was generated from record annual revenue of $54.7 billion. Full-year 2023 free cash flow was $2 billion, or $3.11 per share.
Delta reported these net earnings and positive cash flow despite making more than $4.1 billion in debt and lease obligation payments for the year.
Using the number of shares outstanding, the stock ended 2023 with a price-to-sales ratio (P/S) of 0.62.
Record first-quarter 2024 results
Delta has built on the foundation of 2023 with record-breaking first-quarter results in 2024, with both net earnings and revenue coming in at the high end of previously issued guidance. Revenue was up 6% from the prior year.
Results were driven by increases in corporate (14%), international (12%), and domestic (3%) travel, reflecting strong consumer demand. Remuneration from American Express grew 5% to $1.7 billion for the quarter. Additionally, premium and loyalty revenues were both up more than 10% compared to the year-earlier period.
Delta sees the strong performance continuing through the year, and provided guidance for full-year free cash flow of $3 billion to $4 billion and record second-quarter revenue. The company also anticipates repaying a further $4 billion in debt during 2024.
Delta restarted its quarterly dividend at $0.10 per share last year and is continuing with that payout. The dividend works out to a forward yield of about 0.75%, which is small but a clear indication of improved, and stable, financial health.
Delta's stock has flown too far, too fast
Full-year 2023 and first-quarter 2024 results were striking and lucrative. The reduced debt and continued dividend are further reasons to cheer. But, from a value perspective, the stock is already reflecting the improved operational environment. The stock is close to a 52-week high, and is up more than 80% from the 2022 low.
Besides the run-up in stock price, debt levels remain uncomfortably high, even after recent repayments. Delta ended 2023 with a debt-to-equity ratio of 5.7. At the end of the first quarter, debt to equity came in at the same level. Debt-to-income ratios of 2 or less are generally considered attractive by value-oriented investors. While it is true that Delta is able to meet its debt obligations, it paid over $800 million in interest for 2023, which is a drag on free cash flow and net income.
The company is fundamentally sound and trades at attractive P/E and P/S ratios. However, the price-to-book value of 3.11 reveals that the balance sheet is still weighed-down with excessive debt; considering the relative lack of book value, current share prices are too high to be attractive. Instead, value-conscious investors may want to keep an eye on Delta, looking for a pullback in share price, an increase in dividends, or an even larger increase in free cash flow and net income before adding shares.
