1 Wall Street Analyst Thinks This High Flying Stock Has 57% Upside. Is it a Buy?

Core Viewpoint - Delta Air Lines has received multiple upgrades from major financial institutions, with Morgan Stanley setting a price target of $100, indicating a potential upside of 57$3 billion and $5 billion annually [2]. - Delta aims to reduce its debt-to-EBITDAR ratio to parity, down from 2.9 at the end of Q3 2024 [2]. Valuation Metrics - A significant reduction in the debt-to-EBITDAR ratio would alleviate investor concerns regarding its debt load, while an FCF of approximately$4 billion represents over 9.7% of its current market capitalization [3]. - The price-to-earnings (P/E) ratio is estimated at 10.5 times projected earnings, which is considered low for a company with double-digit growth [3]. - Morgan Stanley's $100 target implies a P/E ratio of 16.6 times 2024 earnings, which is still low for a company with such growth potential [4]. Industry Context - Airline stocks typically trade at lower valuations due to the cyclical nature of the industry, where demand and capacity can fluctuate significantly [5]. - Historical challenges include airlines' lack of discipline in managing capacity during downturns and the volatility of fuel prices, alongside geopolitical risks and pandemic impacts [6]. Capacity Management - Recent actions by Delta and United Airlines indicate a reduction in capacity in response to previous overcapacity, suggesting a more disciplined approach in 2024 [8]. - Management believes they have reached an inflection point in revenue per available seat mile (RASM), a critical metric for the airline industry [8]. Revenue Diversification - Delta's revenue streams are becoming more durable, with a shift towards premium travelers. In 2024, main cabin revenue is expected to account for only 43$4 billion in 2019 to an estimated $7 billion in 2024, with a long-term target of$10 billion [11]. Investor Sentiment - The market's fears regarding Delta's valuation appear exaggerated, as the company is not operating like a traditional airline and is increasingly reliant on higher-income travelers [12]. - The airline industry has shown an ability to manage capacity effectively, providing a basis for optimism regarding Delta's future performance [13]. - Analysts' optimism regarding Delta's financial targets seems well-founded, supporting the potential for valuation expansion [14].