New Industry Mindset, M&A Activity Bode Well for Delta (DAL) - Barron's

January 7, 2013 12:42 PM EST Send to a Friend
Delta Air Lines (NYSE: DAL) has had a pretty good run over the last year with shares moving over 60 percent higher through last Friday. However, that doesn't mean the best is already over.

Over the weekend, Barron's took a look at Delta and its potential moving forward. Given recent consolidation in the industry and the old adage that you "rent, not own," investor sentiment remains mixed on the stock.

On one hand, you have an industry plagued by rising fuel costs, labor unrest, and poor management. Delta itself spent time in chapter 11 bankruptcy until emerging as a lean, mean, flying machine in 2007.

Barron's noted that things have changed recently: fare-cutting is on the way out, management mentality is becoming more profit-focused, and fuel prices are largely firming up. It almost seems the perfect storm for upside.

Delta has remained focused after coming out of bankruptcy, looking to pay down debt while guarding cash. Net debt for the airline is down from $17 billion in 2009 to just $11.8 billion. Delta is gunning to get that number down to $10 billion by the end of 2013.

Cash deployment has also been smart. Delta acquired a minority stake in Virgin Airlines last month, giving it access to London's Heathrow Airport and it bought a Pennsylvania refinery to cut fuel costs further. The company has even managed to work out more favorible contract term with workers via a new agreement struck last summer.

Capacity has also been brought down to manageable levels. Since 2005, Delta has cut domestic capacity by about 25 percent while adding 25 percent to international flights, generally a more profitable area, Barron's notes.

Investors might be concerned with Delta's pension obligations. Delta's pensions were underfunded by $11.5 billion at the end of 2011 and up to $14.1 billion with the addition of other post retirement benefits. Federal regulation doesn't require the pension be fully-funded until 2031 and Delta will be paying-in about $700 million per year over the next five years.

With Delta going for a cheap 5.2 times FY12 EPS expectations, investors who have been avoiding the volatile segment might do well to take flight with Delta.

Shares are modestly higher Monday.


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