Delta Air Lines, Inc. (NYSE:DAL) shares are down more than -6.84% this year and recently increased 0.23% or $0.12 to settle at $52.17. American Airlines Group Inc. (NASDAQ:AAL), on the other hand, is down -2.23% year to date as of 02/13/2018. It currently trades at $50.87 and has returned -0.61% during the past week.
Delta Air Lines, Inc. (NYSE:DAL) and American Airlines Group Inc. (NASDAQ:AAL) are the two most active stocks in the Major Airlines industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.
Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect DAL to grow earnings at a 12.10% annual rate over the next 5 years. Comparatively, AAL is expected to grow at a 9.94% annual rate. All else equal, DAL’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return., compared to an EBITDA margin of 10.14% for American Airlines Group Inc. (AAL). DAL’s ROI is 23.90% while AAL has a ROI of 13.00%. The interpretation is that DAL’s business generates a higher return on investment than AAL’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. On a percent-of-sales basis, DAL’s free cash flow was 0% while AAL converted 0% of its revenues into cash flow. This means that, for a given level of sales, DAL is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Balance sheet risk is one of the biggest factors to consider before investing. DAL has a current ratio of 0.40 compared to 0.70 for AAL. This means that AAL can more easily cover its most immediate liabilities over the next twelve months. DAL’s debt-to-equity ratio is 0.63 versus a D/E of 6.25 for AAL. AAL is therefore the more solvent of the two companies, and has lower financial risk.
DAL trades at a forward P/E of 7.29, a P/B of 2.67, and a P/S of 0.92, compared to a forward P/E of 7.37, a P/B of 6.25, and a P/S of 0.58 for AAL. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. DAL is currently priced at a -27.3% to its one-year price target of 71.76. Comparatively, AAL is -20.73% relative to its price target of 64.17. This suggests that DAL is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 1.60 for DAL and 2.10 for AAL, which implies that analysts are more bullish on the outlook for AAL.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. DAL has a beta of 1.17 and AAL’s beta is 1.04. AAL’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. DAL has a short ratio of 1.77 compared to a short interest of 4.48 for AAL. This implies that the market is currently less bearish on the outlook for DAL.
Delta Air Lines, Inc. (NYSE:DAL) beats American Airlines Group Inc. (NASDAQ:AAL) on a total of 9 of the 14 factors compared between the two stocks. DAL is growing fastly, is more profitable, generates a higher return on investment and has lower financial risk. In terms of valuation, DAL is the cheaper of the two stocks on an earnings and book value, DAL is more undervalued relative to its price target. Finally, DAL has better sentiment signals based on short interest.