Delta Air Lines Inc.’s stock (NYSE: DAL) comprises a formidable combination of value and growth. Despite considerable outperformance of the market in both 2013 and 2014, I feel that DAL has significant opportunity to advance further still. Thanks to recovering global economies as in the US, Delta looks set to benefit from increased air travel demand over the next few years. The company boasts appealing valuation metrics and a considerable prospect of growth of earnings. Additionally, DAL produces strong free cash flows, returning value to its shareholders via dividend payments and stock buyback.

DAL, the second largest passenger airline in the world, offers scheduled air transportation across the globe of both cargo and passengers. The firm has a fleet of around 900 aircraft. As of 21^st January 2014, DAL served 318 destinations in 59 countries across the world.

Technical Analysis

DAL stock price is 0.46% below its 20-day simple moving average, 3.87% below its 50-day simple moving average and 13.19% above its 200-day simple moving average. This suggests a short-term downtrend and a long-term uptrend.

The weekly MACD histogram, an indicator particularly valued by technicians, is negative at -0.55 and descending, which is a bearish signal (a MACD histogram crossing the zero line from below and rising is considered an extremely bullish signal). The RSI oscillator is at 56.81 which does not indicate overbought or oversold conditions.

Valuation Metrics

The valuation metrics for Delta are excellent; the trailing P/E is particularly low at 2.99, and the Enterprise value/EBITDA ratio is also extremely low at 6.24. It is predicted that in the next financial year, the forward P/E will be very low at 9.94 and the average annual earnings growth is estimated to be high at 11.35% for the next five years; these give a very low PEG ratio of 0.88, according to Yahoo Finance. The PEG (price/earnings to growth) ratio is a commonly used indicator of the potential value of a stock. Many investors favour it ovr the P/E ratio because it also accounts for growth. A lower PEG means the stock is more undervalued.

Dividend and buyback program

The forward annual dividend yield is 0.64%, and the payout ratio is only 1.9%. As DAL generates a lot of cash, and the payout ratio is particularly low, it is likely that the firm will raise its dividend payment.

As of mid-July 2014, DAL has returned $550 million to shareholders due to its strong cash generation year to date. It paid $101 million to shareholders through its $0.06 per share quarterly dividend. Furthermore, 12.4 million shares at an average price of $36.33 were repurchased by the company for a total of $450 million. Such repurchases represent $200 million under the May 2014 $2 billion authorisation, as well as completing the May 2013 $500 million authorisation.

Major Developments

DAL is generating strong cash flow, both operating and free. The company has achieved an impressive cash flow growth over the last six years, generating almost $5 billion of operating cash flow and $2.1 billion of free cash flow in 2013. It generated $951 million of operating cash flow and $390 million of free cash flow in the March 2014 quarter, and $2.1 billion of operating cash flow and $1.5 billion of free cash flow during the June 2014 quarter. As of mid-July, the company has used its strong cash generation of 2014 to reduce its adjusted net debt to below $8 billion.

After achieving an operating margin of 15.1% in the last quarter, Delta has elevated its outlook for the September 2014 quarter, now expecting an operating margin of between 15 and 17%.

I consider DAL’s ability to expand its free cash flow very encouraging. Such strong cash flow has enabled the firm to reduce its net debt by more than $9 billion since 2009. DAL ended the June quarter with $6.0 billion of unrestricted liquidity and an adjusted net debt of $7.9 billion.

In both 2013 and this year, the stock of DAL has significantly outperformed the market. Since the turn of 2014, stock has gained 36.4% while the S&P 500 index has increased 4.5% and the Nasdaq Composite Index has risen 4.6%. In addition, since the start of 2013, an astounding gain of 215.6% was recorded, while the S&P 500 index has increased 35.4% and the Nasdaq Composite Index has risen 44.7%. Nevertheless, considering its appealing valuation metrics and considerable prospect of growth of earnings, the stock is, in my opinion, still cheap.

Conclusion

Delta, as the second largest passenger airline in the world, looks set to benefit from increased air travel demand over the next few years due to recovering economies both globally and in the US. The company has appealing valuation metrics and a considerable prospect of growth of earnings; its Enterprise Value/EBITDA ratio being extremely low at 6.24. Delta has implemented its strong cash flows to drive value for its owners by reducing debt and pensions to strengthen its balance sheet, while at the same time returning a substantial amount of cash to its shareholders. All these factors compel me to draw the conclusion that the stock of DAL still has plenty of room to run.