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

After its 71% increase over the last year, investors could be forgiven for wondering whether there's room for Delta Air Lines (DAL -0.54%) stock to run. 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 low-valued stocks, and Delta certainly fits the 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. Delta Air Lines' valuation metrics look good, but 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:

• 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 ticket pricing power.
• Airlines, including Delta, took on considerable debt during the pandemic's height, and the debt overhang could put pressure on their financial situation, given the slowdown in earnings.

Indeed, Delta Air Lines had total debt and finance lease obligations of $16.2 billion at the end of the fourth quarter. 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 that 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% to 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 with discipline 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), a key airline metric, to growth, up 0.4% in Q4.

Image source: Getty Images.

Moreover, Delta's management expects its revenue growth in 2025 (7% to 9%) to outpace its capacity growth of 3% to 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-branded 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 co-branded credit cards. However, the figure came in at $7.4 billion.

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-EBITDAR (earnings before interest, taxation, depreciation, amortization, and rent) ratio now stands at 2.6, compared to 3 times at the end of 2023. Management aims to reduce that to 2 or less by the end of the year.

A stock to buy

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

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