Here are the best airline stocks to buy in 2024

I don’t want to overwhelm you with this, but airlines have traditionally not been a great investment, at least for people interested in stocks. Still, there are strong reasons to believe that this is not necessarily the case.

delta airlines (NYSE:DAL) is a great example of a stock that can buck trends and remain a hot stock in the transportation sector. This is why stocks are so valuable.

Stock investors and bond investors have different views on airline stocks

Even Warren Buffett has lost money on airline stocks in the past, so it’s natural for ordinary investors to approach this issue with caution. The industry’s long-term problem comes down to its inability to generate the necessary return on capital to cover its cost of capital.

As the International Air Transport Association argues, “even before the coronavirus crisis, stockholders risked their capital because “average airline profits are rarely as high as the industry’s cost of capital.” I wasn’t properly compensated for what I did.”

This is bad news for stock investors because the average airline isn’t creating any economic value.But that is do not have Bad news for bond issuers. That’s because they are being rewarded for investing capital in an investment backed by a relatively liquid asset: the airplane itself. This is also good news for aircraft suppliers, whose profits are supported by losses for stock investors.

Why is Delta different?

At this point, I can understand why investors would want to run away and start looking at aerospace suppliers, but hold on, because I think Delta is an option worth considering very carefully.

Dig into recent presentations at JP Morgan Delta Air Lines management at the Industry Council noted that the recovery in air travel has already significantly covered its cost of capital and plans to improve its coverage in the coming years.

Data source: Delta Airlines.

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In other words, Delta Air Lines is currently creating value for equity investors. That’s because revenue and cash flow have increased significantly as the commercial aerospace industry recovers from travel restrictions imposed during the worst of the pandemic.

The table below shows the company’s earnings and cash flow improvement. We also included an adjusted debt to earnings before interest, taxes, depreciation, amortization, and rent (EBITDAR) multiple. This is a typical leverage ratio used by fixed income investors to assess credit quality, and indicates Delta Air Lines’ improving creditworthiness.

Data source: Delta Airlines.

In fact, CEO Ed Bastian pointed out this issue during a JPMorgan presentation, saying, “We’ve always maintained our investment grade status with Moody’s, just one notch below Fitch and S&P.” , we certainly expect at least our benefit.” Indicators on leverage ratios will be available by the end of this year. ”

Utilizing cash flow to pay down debt is key to improving Delta’s balance sheet (adjusted debt decreased from $32.9 billion at the end of 2022 to $29.2 billion at the end of 2023). This is good news for bondholders and stockholders alike.

Delta Air Lines Valuation Remains Very Attractive

Trading at a forward price-earnings ratio of just 6.8 times Wall Street’s earnings estimates and 8.1 times the midpoint of management’s free cash flow guidance, the market has some confidence in Delta’s outlook. The skepticism is clear.

Indeed, the stock sold off after its latest earnings report revealed increased cost pressures and slower sales growth.

But the company remains focused on the premium market (the average Delta customer has a household income of more than $100,000 a year, Bastian said) and is cautious about expanding capacity, so it won’t continue to profit. Expansion is certain.

Meanwhile, the premium market continues to grow strongly, international travel is returning, and Delta’s loyalty program revenue is strong thanks to its U.S. relationship. American Express.

All of this makes Delta Air Lines the transportation industry’s choice and one of the rare airline stocks you can confidently invest in.

Should you invest $1,000 in Delta Airlines right now?

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American Express is an advertising partner of The Ascent, a Motley Fool company. JPMorgan Chase is an advertising partner of The Motley Fool’s Ascent. Lee Samaha has no position in any stocks mentioned. The Motley Fool has a position in and recommends JPMorgan Chase. The Motley Fool recommends Delta Air Lines. The Motley Fool has a disclosure policy.

“Here are the best airline stocks to buy in 2024” was originally published by The Motley Fool