Flying with Delta
The airline business is crumpy. Whenever things look to be improving the airlines invariably get hit, be it with higher oil prices, a slumping economy, terrorism or health risks (e.g. swine flu). On top of that, they typically have a lot of debt and often totter on the brink of bankruptcy. So why do I think now might be a good time to invest in Delta - here are some reasons:
1) Becoming more efficient: Delta is merging with Northwest which makes it the largest airline in the world. Size in itself is not a reason to own the stock but the merged airline will be able to streamline and optimize routes leading to better capacity and lower costs.
2) Owning strategically important hubs: Delta will have an enviable group of hubs - in the US - in particular it is the leading international carrier in New York; in Europe, it has Amsterdam and Paris, and in Japan it has Tokyo (and is trying to get Narita). It is the leading US carrier in the Pacific.
3) Incremental revenue: Airlines are charging for a lot more services e.g. meals, baggage which will bring more revenue.
4) Attractive valuations: the stock is selling on a forward PE of 8.5 and on a Price to sales of .24.
5) Management is among the best
6) Upside potential in the share price: at the beginning of the year, the stock traded at about $12. Today is sells for about $8 and in March it got down to $4. So its trading in the middle of its range for the year. However, back in 2007 it traded over $20.
Given the steps being taken by management, the cheapness of the stock and the possibility that the worst of the downturn in business is behind us (Continental reported traffic was up in August - the first time in over a year) I think the risk/reward opportunity is attractive. Put it this way, I don't think it would take a big upturn in business to feed through to the bottom line.