Stock Pitch - Duke University Investment Club Pitch Nikolai Doytchinov, ... Hedging, refinery...
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Stock Pitch Nikolai Doytchinov, Jonathan Im, Cheng Ma, Yang Wu
Transcript of Stock Pitch - Duke University Investment Club Pitch Nikolai Doytchinov, ... Hedging, refinery...
Stock Pitch
Nikolai Doytchinov, Jonathan Im, Cheng Ma, Yang Wu
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Table of Contents
I. Investment Thesis
II. Industry Outlook
III. Company Analysis
IV. Valuation
I. Investment Thesis
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Delta (NYSE: DAL)
Recommendation: Buy Current Price: $36.95 Price Target: $54.76 (48% upside)
Delta’s strong management team and network strategy have contributed to sustained earnings growth and will continue
to do so, making it a compelling investment based on undervalued market pricing.
Network strategy increases presence in major airports (NYC, London Heathrow, Seattle)
Recovering U.S. economy will increase both corporate and leisure demand for air travel
Effective nonfuel cost reductions are improving operating margins
Oil prices forecast to remain flat or decline over the next several years
Increased management emphasis on returning cash to shareholders
CATALYSTS
RISKS
Fluctuating oil price translates to uncertainty in a major cost driver
High fixed costs make profitability very sensitive to demand
Public concern about Ebola virus may reduce demand
Reduced services in Venezuela due to devalued currency
II. Industry Outlook
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Industry Outlook
Source: IBISworld Industrial Report
IMF Crude Oil Price Estimates U.S. Per Capita Disposable Income
-1.5
-0.5
0.5
1.5
2.5
3.5
35
37
39
41
43
45
08 10 12 14 16 18 20
Tho
usa
nd
s
$ % Change
Growth Rate in Passenger Air Traffic Airlines Industry Revenue
2009 $
III. Company Analysis
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Company Overview
Source: ir.delta.com
Delta Air Lines an American airline that provides services globally
Founded in 1924
Based in Atlanta, GA
Majority of revenue from domestic and Atlantic region
Strong management team
CEO (Richard Anderson) named one of the world’s best CEOs by Barron’s in March 2014
President (Ed Bastian) is also on the boards of Aeromexico and GOL and plays pivotal role in joint ventures
BUSINESS OVERVIEW
COMPETITIVE ADVANTAGES
Leader in industry
Higher pre-tax income in 3Q 2013 than all competitors
Likely to remain a big player since barrier to entry is strong
Strong cash flow
Delta is committed to reducing its debt and as a result only plans on spending $2.3b on CapEx compared to competitor American Airlines spending $5b
Owns refinery
Owns private refinery to hedge against fluctuations in oil prices; expected to save company $300m annually
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Catalysts
Source: ir.delta.com
Network Strategy increases presence in major airports
Bought 49% stake in Virgin Atlantic to expand presence in London
Joint ventures to increase presence in NYC
International gateway from Seattle to Asia
Corporate spending on air travel expected to increase by 7% in 2014; companies like Delta according to survey
Recovering U.S. economy will increase demand for air travel
Effective cost reductions
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Delta: Flying contrary to the pack
Old Planes?
Delta’s Strategic View
Costs of acquisition significantly lower
49 used MD-90s from China Southern Airlines
88 Boeing 717s leased from Southwest
Purchase of 100 new 737-900s, instead of 737 MAX
Purchase of 15 A- 321s, instead of A-320neo
Highest average age of 16.6 years
Other airlines are or are becoming younger
Fuel costs are limiting factor for old jet utility
Maintenance costs could potentially skyrocket
Subsidiary maintenance company is a mitigant
10 different models and 725 planes in their fleet
Delta has pursued strategies counter to prevailing industry practice
Acquisition of a refinery
Subsidiary maintenance company
Opportunistic acquisition of older planes
80% ownership of planes compared to on average 60%
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New Jets and their Benefits
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Risks & Mitigation
Venezuela and Latin America in general only affect a small portion of the total revenue
Unlikely given severe negative implications for Russian economy; few Delta flights use Russian airspace
Empirically, no impact on bookings; Ebola pathogen not transmitted as airborne particle
Hedging, refinery ownership, ability to pass costs to consumers, and secular trend of declining oil prices
Majority of business is U.S. domestic
Reduced services in Venezuela and cash trapped in country due to devalued currency
Russia threatens to close its airspace to western airlines
Ebola scare may reduce air traffic demand
Volatile fuel costs threaten margins
Weak economic recovery outside U.S.
Risks Mitigation
IV. Valuation
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Comparable Companies Analysis
Source: SEC Filings and Bloomberg
Company Share Price
(US$) Market Value
(US$mm) Enterprise
Value (US$mm)
Enterprise value as a multiple of Price / Earnings (x)
Revenue (x) EBITDA (x)
LTM 2014 2015E LTM 2014 2015E LTM 2014 2015E
AMERICAN AIRLINES GROUP INC 33.9 24,764 32,448 1.09 0.79 0.75 7.39 5.57 4.60 20.51 6.74 5.25
UNITED CONTINENTAL HOLDINGS 46.1 16,986 23,510 0.57 0.63 0.61 6.86 5.93 4.88 17.04 10.48 8.09
SOUTHWEST AIRLINES CO 32.5 22,301 21,065 0.95 1.17 1.10 8.15 7.08 6.28 23.32 18.34 15.41
JETBLUE AIRWAYS CORP 10.6 2,990 4,579 0.84 0.82 0.75 6.28 5.82 4.86 19.19 15.69 12.12
ALASKA AIR GROUP INC 42.9 5,765 5,114 1.09 0.99 0.93 4.14 4.61 4.30 12.89 11.55 10.62
Mean 33 14,561 17,343 0.91 0.88 0.83 6.56 5.80 4.99 18.59 12.56 10.30
Median 34 16,986 21,065 0.95 0.82 0.75 6.86 5.82 4.86 19.19 11.55 10.62
High 46 24,764 32,448 1.09 1.17 1.10 8.15 7.08 6.28 23.32 18.34 15.41
Low 11 2,990 4,579 0.57 0.63 0.61 4.14 4.61 4.30 12.89 6.74 5.25
<--------------- 2015E EBITDA Multiples range ------------>
4.0 4.5 5.0 5.5 6.0
Implied EV: 31,379.79 35,316.94 39,254.09 43,191.24 47,128.39
Implied MCAP: 37,620.79 41,557.94 45,495.09 49,432.24 53,369.39
Implied Share Price: 44.63 49.30 53.97 58.64 63.31
<--------------- 2015E Revenue Multiples range ------------>
0.6 0.7 0.8 0.9 1.0
Implied EV: 26,532.07 30,754.87 34,977.67 39,200.47 43,423.27
Implied MCAP: 32,773.07 36,995.87 41,218.67 45,441.47 49,664.27
Implied Share Price: 38.88 43.89 48.90 53.90 58.91
<--------- P/E Multiples range --------->
EPS 8.5 9.5 10.5 11.5 12.5 2.88 24.48 27.4 30.2 33.1 36.0 3.38 28.73 32.1 35.5 38.9 42.3 3.88 32.98 36.9 40.7 44.6 48.5 4.38 37.23 41.6 46.0 50.4 54.8 4.88 41.48 46.4 51.2 56.1 61.0
- Exchange Rates as of 10/01/14
- Share Prices as of 10/01/14
- EV Adjusted for Minority Interests based on Market Value
- EV Adjusted for Equity Value in Associates based on market Value
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Financial Performance: Historical and Projected
Sources: Bloomberg; NASDAQ; authors’ projections
Revenue, $mil EBITDA Margin
EBITDA, $mil Share Price
0
10000
20000
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50000
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Bear
Bull
0%
5%
10%
15%
20%
25%
Base
Bear
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Base
Bear
Bull
$-
$10
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10/3/2012 10/3/2013 10/3/2014 10/3/2015
Base
Bear
Bull
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Discounted Cash Flow Analysis (Base Case)
Discounted Cash Flow (Base Case), cont.
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Valuation Summary In Millions, except per share
Present Value of Enterprise $38,579.4
Less: Total Debt 10,322.0
Less: Minority Interest 0.0
Less: Preferred Equity 0.0
Plus: Cash 4,081.0
Equity Value $52,982.4
Shares Outstanding 852.0
Equity Value Per Share $62.19
Sensitivity Analysis
Exit Discount Rate
Multiple 8.00% 9.00% 10.00% 11.00% 12.00%
2.5x 51.79 50.59 49.44 48.35 47.30
3.5x 58.78 57.26 55.81 54.44 53.13
4.5x 65.76 63.93 62.19 60.53 58.95
5.5x 72.75 70.60 68.56 66.62 64.78
6.5x 79.74 77.27 74.93 72.71 70.60
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Share Price Calculation
