Here's Why This Magnificent Value Stock is a Buy for 2025

After a 71% increase over the last year, investors could be forgiven for wondering whether there’s room to run in Delta Air Lines (DAL -0.54%) stock. I think the answer to that question is “yes,” and after a slew of analyst price target upgrades, it’s clear that Wall Street analysts feel the same way. Here’s why Delta Air Lines is an excellent stock for a long-term investor portfolio. 

What the market is worried about with Delta Air Lines 

It’s not difficult to run a stock screener over the market and find lowly valued stocks, and Delta certainly fits that criteria. For example, the stock is significantly undervalued based on its current and forecast earnings and cash. 

The following table shows some commonly used valuation metrics, which show how good Delta Air Lines’ valuation metrics look. Still, that’s only part of the story. 

Data source: Company presentations. *Wall Street consensus: Delta’s management expects more than $4 billion in free cash flow in 2025.

There are a few reasons why the market is pricing Delta so cheaply, and they include the following:

• The airline industry is traditionally seen as highly cyclical, with boom periods followed by bust periods as airlines stick to running unprofitable routes while waiting for another upturn and a return to ticker pricing power 
• Airlines, including Delta, took on considerable debt during the pandemic, and the debt overhang could put pressure on their financial situation, given the slowdown in earnings.

Indeed, Delta Airlines had total debt and finance lease obligations of $16.2 billion at the end of the fourth quarter, and the market is worried about what will happen if the traditional bust follows the recovery boom that occurred after the end of lockdowns. 

Image source: Getty Images.

Why the market’s fears are overblown

There are powerful reasons to believe Delta is an outstanding value stock, and the valuation reflects overblown concerns. 

First, the current trading momentum is excellent, with the more profitable corporate traveler returning, transatlantic travel coming back, and ongoing strength in its premium cabin offerings. Indeed, management expects revenue growth of 7%-9% in the first quarter of 2025 with “an acceleration in air travel demand from corporates and consumers and cobrand card spending growth accelerated” from the fourth quarter of 2024 continuing into the New Year according to CEO Ed Bastian on the earnings call.

Second, premium airlines are behaving disciplinedly and cutting unnecessary capacity, leading to a return of ticket pricing power. The disciplined behavior of the industry and Delta helped the airline return its adjusted total revenue per available seat mile (TRASM) to growth (up 0.4%). in the fourth quarter—a key airline industry metric. 

Image source: Getty Images.

Moreover, Delta’s management expects its revenue growth in 2025 (7%-9%) to outpace its capacity growth of 3%-4%.

Third, Delta Air Lines is more than an airline travelers use on a transactional basis, thanks to its highly successful SkyMiles loyalty program and its co-brand credit cards with American Express. On its investor day in November, management told investors to expect $7 billion in 2024 in remuneration to Delta from American Express from the cobrand credit cards. However, the figure came in at $7.4 billion. Moreover, Delta continues to gain traction with its focus on the premium traveler, with premium revenue up 8% in 2024 (compared to a 5.7% increase in overall operating revenue). With 85% of incremental seats in 2025 expected to be in the premium cabin, investors can expect more growth in Delta’s premium revenue. 

Fourth, Delta’s cash flow generation is leading to significant debt reduction, and all three credit rating agencies have now given Delta an investment-grade credit rating. Its adjusted debt to earnings before interest, taxation, depreciation, amortization, and rent (EBITDAR) now stands at 2.6 times EBITDAR compared to 3 times at the end of 2023, and management aims to reduce 2 times or less by the end of the year.

Image source: Getty Images.

A stock to buy

While there’s no guarantee the travel market won’t slow down in 2025, the current trading momentum is excellent, and the improvement in TRASM is a positive sign. Its debt metrics are improving dramatically, and the strategy of growing its premium revenue dovetails perfectly with its loyalty programs and cobrand credit cards.  

Overall, Delta doesn’t deserve its low valuation, and there’s plenty of potential for stock price appreciation.