QPD In Action – 1Q24

QPD In Action – 1Q24

This quarter we feature a high-flying business that meets our Quality | Price | Discipline process, Delta Airlines.

Delta (DAL)

Delta is the largest airline in the United States, with nearly 23% market share, and boasts one of the best balance sheets and highest ROICs versus the big four airlines in the United States.

Entering harvest mode (reduced spending on established products to maximize profits) on significant aircraft and technology investments during COVID recovery from 2021-2023.  Air travel revenue returning to long-term trends.

 

Key Facts

  • With a generally healthy consumer and ongoing recovery in business travel, Delta is primed to maintain margins at its current double-digit level, whilst growing the top-line at least 5%/year over the next few years tied to airline acquisitions, airfare growth, and new routes.
  • Delta and other larger cap airlines are in a unique position to re-capture lost market share from the low-cost carriers that continue to struggle in what is likely to be a longer than expected inflationary backdrop, especially for key cost inputs like labor and energy.
  • Industry quality remains poor (5-12x p/e industry) for now, and some cost variables remain chaotic (oil) and most others still inflationary (wages, airport fees, cost of equipment, maintenance).
  • Delta’s “premiumization” strategy is paying significant dividends due to the tremendous cash flow and value creation from its AMEX partnership, helping to drive billions in excess cash flow annually and further pay down debt, invest in aircraft, and build out terminals and lounges that create a feedback loop in the Delta network.

 

QUALITY

PRICE

DISCIPLINE
  • 2nd best capitalized large cap airline.
  • Delta should be able to generate sufficiently positive FCF through the next consumer downturn and may likely emerge stronger than in prior crises (2001, 2008).
  • Delta has a very strong chance of maintaining healthy ~10% EBIT margins, supporting ongoing $6-7/shr EPS, albeit with a very uncertain and likely nonlinear path.
  • Cambiar believes that Delta’s earnings are highly undervalued @ 6.8x our 2025E EPS, versus a long-term average of 8-10x, and think that structurally, for the first time in a couple decades, there is meaningful upside to the long-term multiple/yield of the equity.

 
  • Overall view: cautious near-term as the economy broadly weakens, but very cheap equity with cash flow protection, valuable assets, and “need” service.
  • Cambiar believes the long-term positive framework for industry improvement exists, and broader earnings multiples should increase over time.

 

SECURITY FOUND IN FOLLOWING PORTFOLIO(s): Large Cap Value, Opportunity Fund, Aggressive Value ETF, & Global Equity
SPONSORING ANALYST: Adam Ballantyne

 

 

Disclosures

Certain information contained in this communication constitutes “forward-looking statements”, which are based on Cambiar’s beliefs, as well as certain assumptions concerning future events, using information currently available to Cambiar.  Due to market risk and uncertainties, actual events, results or performance may differ materially from that reflected or contemplated in such forward-looking statements. The information provided is not intended to be, and should not be construed as, investment, legal or tax advice.  Nothing contained herein should be construed as a recommendation or endorsement to buy or sell any security, investment or portfolio allocation.  Securities highlighted or discussed have been selected to illustrate Cambiar’s investment approach and/or market outlook and are not intended to represent the performance or be an indicator for how the accounts have performed or may perform in the future. The portfolios are actively managed and securities discussed may or may not be held in client portfolios at any given time.

Any characteristics included are for illustrative purposes and accordingly, no assumptions or comparisons should be made based upon these ratios. Statistics/charts may be based upon third-party sources that are deemed to be reliable; however, Cambiar does not guarantee its accuracy or completeness.  Past performance is no indication of future results.  All material is provided for informational purposes only, and there is no guarantee that the opinions expressed herein will be valid beyond the date of this communication.

Source: Cambiar Analysis & Delta company disclosure