The 'Cuban Gold Rush' Could Boost This Airline Stock by 79% This Year

Delta Air Lines just got approval to fly to Havana. It's also about to issue another strong earnings report. Grab this airline's undervalued shares now, before they take off.
By John Persinos ,

Mention airlines to some investors and they'll make a face as if they've just smelled something bad. The industry's reputation isn't great on Wall Street. The preconception is that air carriers are saddled with expensive union labor, high fuel costs, enormous capital expenditures, heavy federal regulations and razor-thin profit margins.

This is an outdated caricature of the truth, however. When the conventional wisdom is wrong, it's time for you to pounce and make money.

Airlines these days are enjoying a renaissance, as economic recovery, falling unemployment and increasing consumer confidence prompt more people to buy tickets. You can add another powerful catalyst for growth: the opening of postembargo trade with Cuba, the rough-cut gem of the Caribbean.

We examine Delta Air Lines (DAL) - Get Report , which is scheduled to report robust second-quarter earnings on July 14. In another positive portent for Delta, news has just emerged that the Atlanta-based airline has won permission from the U.S. government to operate nonstop service to Havana daily from New York, Atlanta and Miami. Below, we also unveil an ingenious investment method that makes money in good times and bad. 

One of the best ways to reap profits over the long haul is to tap accelerating trends. The launch this year of lucrative business ties with Cuba fits this description. Delta joins several other airlines, including Southwest Airlines, American Airlines Group and JetBlue Airways in getting approval from Uncle Sam to fly to Havana. The opening of Cuba to commercial air travel should drive long-term passenger demand and revenue for Delta and its peers.

In other emerging markets, a rising middle class is demanding the "Western good life" and embracing tourism. Travel is especially booming in Asia, where economic woes haven't dented the urge to vacation, see relatives and experience the world.

At the same time, persistently low fuel costs are proving to be a bonanza for airlines, sharply reducing their overhead. Most airlines also are getting restive unions under control, while consolidation among carriers is generating economies of scale.

The best airline stock to own now? By far, it's Delta. The airline has a firm grip on fuel costs, in large part because it had the foresight (and boldness) to buy its own refinery. The facility, which processes crude oil into jet fuel, even made a profit in full-year 2015.

The carrier is expanding assertively but prudently into thriving overseas markets such as Cuba, opening new and promising hubs in strategic U.S. airports, buying advanced fuel-efficient planes from companies such as Boeing and forging productive relationship with its unions.

For the first quarter of 2016, Delta and rivals Southwest Airlines, American Airlines Group and Alaska Air Groupreported better-than-expected earnings. Delta's on track to post another great quarter, as well as consistent earnings growth for the rest of the year.

Analysts expect Delta to report second-quarter adjusted earnings per share of $1.51, vs. $1.27 in the second quarter of 2015. Third-quarter adjusted EPS is projected to come in at $1.82, up from $1.74 in the same quarter last year. For all of 2016, analysts expect adjusted EPS of $5.94, vs. $4.61 in 2015. In 2017, the airline is expected to see adjusted EPS continue to increase, to $6.11.

Delta Air Line's trailing 12-month price-to-earnings ratio stands at 6.3, which is low compared to the industry's trailing P/E of 9.8. And yet the stock's growth prospects are superb.

Before the market opened Friday, DAL shares traded at $36.37. The median 12-month price target from analysts is $55, which suggests that the stock can gain 51% in the next year. The highest price target among analysts is $65, implying a gain of 79%. In today's fear-filled and volatile market, those anticipated gains are stunning. The time to buy the stock is now, before the company releases an earnings report that's expected to be strong.

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John Persinos is an editorial manager and investment analyst at Investing Daily. At the time of publication, Persinos held shares of Boeing.

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