Is it Just Declining Oil Prices, or Something Else Driving Delta Up?

Industry driven momentum, coupled with oil price dip is driving Delta
upwards.
Delta presents attractive valuations at the moment.
Dividend and share repurchase plans will add value for shareholders.
It will be interesting to see if the stock could break beyond the level of $43.

Shares of airline industry are up again, after the bears made the airline stocks trade
at their lower end values following the Ebola-virus news. Correspondingly, the share
prices of Delta (DAL), United Airlines (UAL) and American Airlines (AAL) dropped
approximately 18%, on average, as the investors were concerned that people will
reduce travel to avoid exposure from catching Ebola. But the trend has shifted now
as Delta has regained its upward moving trend. Although fears of Ebola spread-out
still exist, and people are taking precautions and decreasing unnecessary travel,
shares in the airline industry are on the rise. So, what is it that is driving share price
right now? I believe that, though falling oil prices have a considerable impact;
momentum is also driving airline prices up.
The impact of Momentum:
As JPMorgans analyst Jamie Baker has said in a recent report that buying American
Airlines now almost guarantees gains. According to him, When shares of
Continental Airlines and post-merger United have fallen by 30 percent, which has
happened 28 times since 1993, they rebounded with an average gain of about 103
percent. Deltas stock is no different. Historic pattern has suggested that Deltas
stock has a high correlation factor with movement of airline industry, on average.
Therefore, I expect the stock to continue rising till around early $40s.
While oil price decline has acted as a trigger and catalyst for the shift in a declining
trend, this certainly is not the whole story. As almost all airline companies hedge the
price risk of oil, and since hedge works both ways; therefore, the benefits derived
from lowered oil prices will be partially mitigated given the extent of hedging
strategy employed. Therefore, Ill suggest keeping an eye on the $43 mark. If the
stock is able to go beyond this level, then the true impact of oil price decline will be
visible.
Valuation:
Given below is the summary of valuation provided by 16 brokers. At the moment,
the median price estimate is $51 which provides significant upside potential. The
low target of $45 is quite close to being achieved as the stock is currently trading at

$42.69. Although I would consider this lower price to be achievable in the near term
outlook, going beyond and reaching the median price will have to test the 52-week
high of $43. The company does have strong fundamentals, and $51 seems in reach
for the stock price. The only impediment is breaking the $43 mark. If it does so, the
investors might consider holding the stock for at least up to $51.
Therefore, while Im sure that the stock is going to maintain its early $40s strength,
going beyond that is what investors need to keep an eye on. And Ill advise
investors to look for buy signals around the level of $43.
Likewise, PE and PEG ratios present a very promising picture in comparson to both
industry and the S&P 500 index.

Source: Yahoo Finance

P/E ratio for the company is 13.14 which is quite lower than the industrys 22.66, as
well as relatively lower than the S&P 500 index 17.19. Likewise, PEG ratio for the
company is 1.01 which is lower than the industry average and S&P 500 index PEG
ratios of 1.80 and 2.11 respectively. These numbers present a very attractive
valuation for DAL. And based on these figures, there is more reason to invest in
Delta right now. However, as mentioned earlier, investors should keep in mind the
testing point of $43 to decide for further entering the stock.
Dividend and Share Repurchase Plans:
In order to maximize share holders value, in May 2014, Deltas board approved a
50% increase in dividends, and simultaneously approved a $2 billion share buyback
program. This program will continue till 2016. Thus, shareholders should find
comfort in knowing that the share repurchase program will act as a buffer in case
the stock plunges, though the chances of this happening are little in the near term
outlook.
Final Remarks:
Keeping the current outlook in perspective, a $43 is a critical point for deciding a
further buy in or out of the stock. Momentum coupled with oil price decline is
signaling an appreciative trend in stock price. Concerns over Ebola disease will act
as a downward pressure and could restrict the stock price going beyond the level of
$43.

Therefore, Ill recommend investors to keep a close eye on the share price at the
moment, and act accordingly. On fundamental outlook, there is nothing wrong with
the company, and the stock should reach the median price target of $51.