On Monday, Morgan Stanley updated its financial outlook for Delta Air Lines (NYSE:DAL), increasing its share price target on the company's shares to $85 from the previous $77. The firm maintained an Overweight rating on the airline, signaling confidence in its future performance.
The reassessment of Delta's value is attributed to expectations of higher earnings in the coming years and a projected price-to-earnings (P/E) multiple at the upper end of Delta's historical range of 8-10x. Morgan Stanley draws a parallel between Delta's strategic move towards premium services and the successful rebranding of Abercrombie & Fitch as a premium retailer, which the market has positively received.
Delta Air Lines is seen as emerging from the pandemic as a more robust business, benefiting from both industry-wide changes and its internal strategic adjustments. Despite these improvements and a recovery in revenues and earnings before interest and taxes (EBIT) to pre-pandemic levels, Delta's stock is still trading below its 2014 peak P/E of approximately 12x.
In a scenario where Delta's valuation mirrors the doubling seen in Abercrombie & Fitch's stock, reaching a P/E of about 12x based on Morgan Stanley's 2025/2026 average earnings estimates, the airline's shares could approach $110. This represents a significant increase from the current price of around $47.
Moreover, compared to the average peak P/E of approximately 17x for high-growth airline stocks, there is room for further upside. Should Delta trade at this average peak P/E, its shares could potentially reach a price close to $150, representing nearly a 250% increase from current levels. This potential is still modest compared to the approximately 500% rise observed in Abercrombie & Fitch's stock.
InvestingPro Insights
With Morgan Stanley's revised outlook for Delta Air Lines, investors may find additional context in real-time data and insights from InvestingPro. Delta is currently trading at a low earnings multiple of 6.64, which is lower than the historical range of 8-10x mentioned by Morgan Stanley. This suggests that the stock may indeed be undervalued, aligning with the firm's analysis. Furthermore, the company has shown a strong return over the last six months, with a price total return of 30.05%, indicating a positive trend in investor sentiment.
InvestingPro Tips highlight Delta's high shareholder yield and its status as a prominent player in the Passenger Airlines industry. These factors could contribute to the stock's potential upside. However, it is important to note that five analysts have revised their earnings downwards for the upcoming period, which could impact future performance. Additionally, the stock's RSI suggests it is in overbought territory, which might signal a pullback in the near term.
For those considering an investment in Delta Air Lines, there are more InvestingPro Tips available that could further inform your decision. With the use of coupon code PRONEWS24, you can get an additional 10% off a yearly or biyearly Pro and Pro+ subscription to access these valuable insights. There are currently 11 additional tips listed on InvestingPro for Delta Air Lines, providing a comprehensive analysis for prospective and current investors.
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