Airlines have not traditionally been good investments, but recent changes to the industry look poised to change this model. While airline stocks still do face an above average level of risk, Delta Air Lines (NYSE:DAL) remains one of Wall Street's top picks.
At a time when many investors are having a tough time finding cheap stocks, Delta Air Lines may be just what your portfolio's looking for.
Delta Air Lines appears cheap based on several metrics, but the airline's PEG ratio is particularly interesting. Measuring the current price to earnings ratio divided by estimated earnings growth, the PEG ratio lets you know how much you're paying for current earnings and future growth.
In the case of Delta, its PEG ratio comes in at just 0.89, reflecting the airline's low current earnings multiple and strong forecasted growth rate.
The airline also receives positive opinions from Wall Street analysts with 10 "strong buy ratings" and one "buy" rating from analysts reporting to NASDAQ. While doing your own research and not blindly following analysts is definitely important, it's still nice to know that those closely following Delta find its stock appealing.
Delta vs. rivals
Over the past couple years, Delta Air Lines, and the airline industry as a whole, has posted a major comeback with record earnings now being reported. But while other airlines have shared in the gains as well, Delta has remained ahead of them in multiple ways.
As Delta's profits rose, the airline was the first among the three major legacy carriers to launch a dividend and stock buyback program. Although its dividend was about the same as Southwest Airlines' (NYSE:LUV) when it was launched and has now been joined by dividends from American Airlines Group (NASDAQ:AAL), Delta's stock buyback program with its $2 billion authorization remains the largest of its legacy peers.
While American Airlines Group and United Continental (NYSE:UAL) are trying to compete with Delta in its capital returns to shareholders, Delta looks to have the advantage in this area over the next few years. With better margins than United Continental and fewer new aircraft orders than American Airlines, Delta could become the king of airline free cash flow.
In a June presentation, Delta forecasted $3 billion in free cash flow in its five-year targets. That cash could be used for a number of things including further debt reduction, higher dividends, or more share buybacks.
What else could that cash be used for? With Delta Air Lines it could be for something investors haven't even thought of. Remember, this is the airline that bought an oil refinery to reduce fuel expenses and control more of its supply chain.
Delta also used its cash to find a way into the London Heathrow market by purchasing a 49% stake in Virgin Atlantic Airways for $360 million. Since then, Delta and Virgin Atlantic have formed a joint venture that strengthens Delta's network and builds its hub at New York JFK International.
While most of the free cash flow will probably find more conventional uses, Delta's think-outside-the-box perspective could find an even better use for the cash if the opportunity presents itself.
A buying opportunity
With shares off 17% from their June highs, you may be wondering what happened to Delta. But the big move downward happened on pretty light news.
In its August traffic report, Delta adjusted its September PRASM estimate from a 2%-4% year-over-year increase down to a 2%-3% year-over-year increase. Airline stocks have also been hit by the cancelling of most flights to Venezuela, fears of terrorist attacks from ISIS, and fears of an Ebola pandemic.
However, the market largely ignored the good news from Delta over the past few months, including its second quarter earnings beat and a major drop in oil prices. With shares nearly a fifth cheaper than they were in June, I view this sell-off as a good way to acquire shares at a lower price.
Ready for takeoff
With markets at their current levels, finding a combination of value and growth can be a tough proposition. But Delta Air Lines appears to fit the bill and has plenty of Wall Street support behind it.
While airlines do carry greater levels of risk than most companies, Delta's current position makes it worth looking at to see if it fits with your overall investment strategy.
Alexander MacLennan owns shares of AMERICAN AIRLINES GROUP INC and Delta Air Lines. Alexander MacLennan has the following options: long January 2015 $17 calls on AMERICAN AIRLINES GROUP INC, long January 2015 $32 calls on AMERICAN AIRLINES GROUP INC, long October 2014 $36 puts on AMERICAN AIRLINES GROUP INC, long January 2015 $22 calls on Delta Air Lines, long January 2015 $25 calls on Delta Air Lines, and long January 2015 $30 calls on Delta Air Lines. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.