Delta Air Lines (NYSE:DAL) has been the leader of the pack as the U.S. airline industry recovers from the Great Recession. In a period of less than two years starting in mid-2012, Delta stock shot up from less than $9 to an all-time high of $42.66 this past June.

DAL Chart

Delta Air Lines One-Year Stock Chart, data by YCharts.

However, Delta stock has fallen about 15% from its high, hitting $36 in recent weeks. This may be a great opportunity for investors to load up on shares of one of the most financially solid airlines in the world.

A favorable valuation

At its recent price, Delta trades for a little more than 11 times expected 2014 EPS of $3.23. That makes it cheap in just about anyone's book. Yet that figure actually understates just how cheap Delta stock may be today.

First, Delta's earnings have been growing rapidly recently. In 2013, the company's adjusted pre-tax income was about $2.7 billion -- up from $1.6 billion the year before. For the first half of 2014, Delta's adjusted pre-tax income totaled $1.9 billion, and the first half of the year tends to be seasonally weaker.

That puts Delta on pace to exceed $4 billion of pre-tax income this year. Considering how rapidly Delta has been growing its earnings recently, Delta stock should probably be trading at a higher earnings multiple.

Delta has reported strong earnings growth in the last few years. Photo: The Motley Fool

Second, Delta is currently reporting an effective tax rate of 38%-39% in its earnings releases. However, as of the end of 2013, Delta had nearly $14 billion of deferred tax assets, primarily due to losses incurred during the Great Recession and accelerated depreciation credits. As a result, Delta will pay little or no cash taxes for years.

Thus, while Delta is likely to report $1.5 billion-$2 billion in annual tax expense for the next several years, this is just an accounting maneuver. Free cash flow is a more meaningful measure of the power of Delta's earnings.

In the 12 months ending on June 30, Delta generated $2.8 billion of free cash flow, or $3.31 per share. Thus, Delta stock trades for approximately 11 times trailing free cash flow. Free cash flow continues to rise, too: Delta's management recently projected that the company will generate more than $3 billion of free cash flow in 2014.

King of the hill

Among Delta's two main rivals, American Airlines (NASDAQ:AAL) and United Continental (NASDAQ:UAL), only American can come close to Delta in terms of profitability. Delta earned adjusted pre-tax income of $1.9 billion on revenue of $19.5 billion in the first half of 2014, representing a 9.7% pre-tax margin.

Meanwhile, American Airlines also earned a $1.9 billion adjusted pre-tax profit. However, American had $21.4 billion in revenue, so its pre-tax margin was a full percentage point lower at 8.7%. United Continental trailed far behind the pack with adjusted income of $430 million in the first half of 2014, representing a paltry 2.3% profit margin.

American Airlines has posted strong earnings results recently, but it trails Delta in free cash flow by a wide margin. Source: American Airlines.

Delta also has a huge lead in terms of free cash flow over American Airlines (let alone United). American has a staggering level of capital commitments and expects to spend more than $5 billion on capex on average for the next several years. By contrast, Delta (which is just slightly smaller) plans to spend just $2.3 billion on capital expenditures this year.

Delta's superior free cash flow is an important advantage, because it will allow the company to reduce its debt levels more quickly while also returning a lot of capital to shareholders over time, primarily through share repurchases.

A solid choice for long-term investors

Delta stock has quadrupled in the last two years, and investors shouldn't expect to see a similar performance over the next two years. However, while Delta stock isn't as egregiously undervalued today as it was in mid-2012, it still seems quite cheap in light of the company's recent earnings growth and substantial free cash flow.

Long-term investors can afford to sit tight and enjoy the benefits of Delta's strong cash flow. In the next few years, Delta will be able to pay down the bulk of its debt, fund most of its pension liabilities, and maintain a 1% dividend yield while buying back some Delta stock.

As Delta fulfills most of its debt and pension funding goals in the next few years, it will be able to devote ever more cash to shareholder-friendly uses. Long-term Delta shareholders thus have a lot to look forward to in the next five to 10 years.