Earnings

A Side-by-side Analysis of Delta Air Lines, Inc. (DAL) and Lennar Corporation (LEN)

Delta Air Lines, Inc. (NYSE:DAL) shares are down more than -6.79% this year and recently increased 0.06% or $0.03 to settle at $52.20. Lennar Corporation (NYSE:LEN), on the other hand, is down -3.18% year to date as of 02/14/2018. It currently trades at $61.23 and has returned 0.53% during the past week.

Delta Air Lines, Inc. (NYSE:DAL) and Lennar Corporation (NYSE:LEN) are the two most active stocks in the market based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.

Growth

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect DAL to grow earnings at a 12.10% annual rate over the next 5 years. Comparatively, LEN is expected to grow at a 17.81% annual rate. All else equal, LEN’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 9.47% for Lennar Corporation (LEN). DAL’s ROI is 23.90% while LEN has a ROI of 4.90%. The interpretation is that DAL’s business generates a higher return on investment than LEN’s.

Cash Flow 




Cash is king when it comes to investing. On a percent-of-sales basis, DAL’s free cash flow was 0% while LEN converted 5.43% of its revenues into cash flow. This means that, for a given level of sales, LEN is able to generate more free cash flow for investors.

Liquidity and Financial Risk

DAL’s debt-to-equity ratio is 0.63 versus a D/E of 1.01 for LEN. LEN is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

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 10.73, a P/B of 1.96, and a P/S of 1.13 for LEN. 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

When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. DAL is currently priced at a -27.26% to its one-year price target of 71.76. Comparatively, LEN is -21.56% relative to its price target of 78.06. 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 1.90 for LEN, which implies that analysts are more bullish on the outlook for LEN.

Risk and Volatility

No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. DAL has a beta of 1.17 and LEN’s beta is 1.16. LEN’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.DAL has a short ratio of 1.76 compared to a short interest of 5.44 for LEN. This implies that the market is currently less bearish on the outlook for DAL.

Summary

Delta Air Lines, Inc. (NYSE:DAL) beats Lennar Corporation (NYSE:LEN) on a total of 9 of the 14 factors compared between the two stocks. DAL is more profitable, generates a higher return on investment, higher liquidity and has lower financial risk. In terms of valuation, DAL is the cheaper of the two stocks on an earnings and sales basis, DAL is more undervalued relative to its price target. Finally, DAL has better sentiment signals based on short interest.

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