Delta Has 63% Upside, Buckingham Says

In a report issued Wednesday, Buckingham Research analysts Daniel McKenzie and Scott Park reiterated a Buy rating and $75 price target on Delta Air Lines, Inc. (NYSE: DAL). After factoring a 1 percent dividend yield, the price target implies an upside of roughly 63 percent from current stock prices.

Despite the bullish rating and price target, the firm decided to trim its earnings estimates for the first quarter of fiscal 2016  on the back of increasing fuel prices and slightly lower revenue.

The company’s management team said on Tuesday they believe they can restore pricing later in 2016. In addition, Buckingham sees “the network restructuring and demand trends that should get them there.”

Leaving revenue aside, at $60 oil, the firm estimates Delta generates $6 billion in pre-tax profits (versus the firm’s current forecast of $8.5 billion), a 15 percent FCF yield (compared to the current 20 percent outlook): “In short, $17B in pre-tax profits this year and next is a disconnect from both a $37B market cap and as of mid-Feb, an investment grade rated balance sheet."

So with shares down about 9 percent year-to-date, trading at only 6.5 times the firm’s 2016 outlook, the stock looks like “a bargain,” offering a compelling risk/reward profile. Under the firm’s best case scenario, upside could reach 69 percent; under the worse case scenario, downside could reach 16 percent at the most.

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.