Despite persistently high demand, rapidly improving internal economics and record profits, Delta Air Lines (NYSE: DAL) stock has struggled to gain traction. The company’s efforts are reducing debt and lowering the leverage ratio, and has it on track to regain investment-quality debt ratings. The cash flow is solid, the company forecasts another massive debt reduction this year, and there is a dividend to consider.

The dividend was recently reinstated and is on track for aggressive increases over the next few years. Altogether, this stock has everything it needs for its price to move to new highs, sustain them, and rally to new highs; the only question is if the market will follow through on the opportunity. 

Delta Has Record Quarter: Guides for Growth

Delta Air Lines had an excellent quarter with strong demand in travel, business, and international segments. The company reported $13.75 billion in net revenue for a gain of 7.8%, which outpaced the consensus reported by Marketbeat by nearly $1 billion or 690 basis points. More importantly, the company’s business is normalizing alongside aggressive optimization of profit hubs, significantly improving profits. 

The company’s total cost per average seat-mile or CASM fell by 5.7%. Non-fuel costs rose 1.6% to align with forecasts, while fuel costs fell by 5.4%. Total revenue per seat mile fell -0.7% but was offset by volume and cost efficiency to drive a 0.1% profit increase. The result is a 50 basis points improvement in operating margin to 5.1% and $1.4 billion in free cash flow after investments and profit-sharing. On the bottom line, the adjusted EPS is nearly double from last year at $0.45 and 20% ahead of forecasts. 

The best news in the report is the cash flow and its impact on business health. The company reduced debt by another $1 billion in Q1 and forecasts an additional $3 billion in reduction for the year. The company’s leverage ratio is down to 2.9X and supports a shift in rating quality.

Fitch and Moody affirmed their high B ratings and updated the outlook to positive, citing debt reduction and the expectation for cash flow. Regarding cash flow, the company's guidance forecasts mid-to-high single-digit growth in Q1 and full-year earnings in a range with the mid-point above consensus. 

Delta Air Lines is Undervalued in Many Ways

Delta Air Lines is undervalued in many ways, including its price multiple and market outlook. The price multiple is running in the high single digits, about half what it should be given the cash flow, debt reductions, and the expectation for an investment-quality credit rating to follow. The catalyst in this scenario may be the dividend on track for aggressive increases. The company recently reinstated the payment but has yet to match the pre-pandemic payout levels, which are levels it will be able to match and sustain soon. 

Analysts rate Delta as a Buy and view it as a deep value. Even with the 5% pop in price action driven by the Q1 results, the market is still below the analysts' lowest target. The lowest target implies another 1% upside, and the consensus is about 15% higher. A move toward the consensus will be enough to put the market above critical resistance and may catalyze a technical momentum rally.

Delta is at a Critical Turning Point

Delta Air Lines stock is at a critical turning point and may move higher. However, we’ve been here before, and there is a risk that resistance will cap gains at the $52 level or lower. In this scenario, the market may consolidate before moving higher or sinking back into its trading range. If the market can sustain upward movement now, set a new high, and sustain it, this transportation stock price could rally through year-end.