Delta Air Lines, Inc. (NYSE:DAL) stock hasn’t exactly taken off over the past year. DAL stock is only up a meagre two percent in that period, but that hasn’t deterred billionaire George Soros from picking up some shares.
In its latest 13F filing, Soros Fund Management indicated that it purchased an additional 740,000 shares in Delta Air Lines during the fourth quarter of 2015. That purchase increased Soros’ stake in the airline by 60% and now brings the total value of his holding in DAL stock to just over $100 million.
Delta Air Lines’ stock price wavered between $45.00 and $52.00 dollars in the quarter in which Soros made his purchase. DAL stock is currently trading at $48.20 per share.
So what does Soros see in Delta Air Lines? Let’s take a look.
More recently, DAL stock was down almost 20%, as cheap oil prices sparked fears of a slowing global economy. One would think that the drop in oil prices would be a boon to airline stocks such as DAL (think cost savings), but it’s been the opposite. Investors apparently think the drop in oil prices is a sign of a slowing global economy, which means there will be less demand for travel.
As oil prices have recovered a bit, so has DAL stock. Since reaching its low in early February, DAL stock is flying high with a 20% gain. But Delta Air Lines stock is still sitting around the price range at which Soros bought it.
Soros may have seen then that DAL stock is incredibly cheap and undervalued. At it’s current price, DAL looks like a bargain, with the stock trading at only 8.56 times last year’s earnings and only 6.6 times the company’s forward earnings.
Buckingham Research analysts Daniel McKenzie and Scott Park reiterated a “Buy” rating and $75.00 price target on DAL stock. At its current stock price, that’s about a 56% upswing for DAL stock. (Source: “Delta Has 63% Upside, Buckingham Says,” Benzinga, March 9, 2016.)
“In short, $17.0 billion in pre-tax profits this year and next is a disconnect from both a $37.0 billion market cap, and, as of mid-Feb, an investment grade rated balance sheet,” the analysts said of DAL stock. (Source: Ibid.)
Aside from a cheap price, there is a lot to be upbeat about on DAL stock.
In the latest quarter, Delta Air Lines reported on January 19 that adjusted pre-tax income increased 42% over the last year. For the full year, pre-tax income increased 29% over 2014. Revenue for the quarter was down about 1.5% over last year, but Delta Air Lines attributed about two percentage points of impact from foreign currency. (Source: “Delta Air Lines Announces December Quarter and Full Year 2015 Profit,” Delta Air Lines, Inc., January 19, 2016.)
With oil prices down, DAL is going to save a lot of money. In 2015, Delta’s fuel costs were reduced by 44%, allowing the company to save about $809 million. (Source: Ibid.) The company is also projecting to save a substantial amount in 2016 as well.
Delta is also undergoing other cost-cutting initiatives, such as retiring most of its fleet of 50-seat regional jets, which are expensive to operate. All in all, Delta Air Lines expects to save more than $3.0 billion in 2016 from lower fuel prices and numerous operational efficiency initiatives. (Source: Ibid.)
Delta’s cost savings will also be a boon for dividend investors. Some of that free cash will be used to return to shareholders in the form of dividends or buybacks. Delta has boosted its dividend by 50% each year for the last two years. Plus, Delta Air Line’s board authorized a $2.0-billion share repurchase program a couple of years ago that should be completed by the end of 2016. DAL stock currently has a dividend yield of 1.11%.
The Bottom Line on DAL Stock
George Soros has a knack for sensing value in a company and Delta Air Lines should be no different. DAL stock has an extremely low valuation and will benefit from low oil prices and operational efficiencies. Investors may want to take a look at DAL stock.