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Delta airlines

Delta airlines

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Delta airlines

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  1. Delta airlines Module 12: Reformulation revisited and more complete analysis of profitability and growth Laura conti

  2. Delta airlines • Delta has 18.6% of the market share in the domestic airline industry • Headquarters: Atlanta, Georgia

  3. Delta Airlines • 596 destinations in 116 countries • More than 80,000 employees • Serves more than 165 million passengers

  4. Delta Airlines EXPANDED BALANCE SHEET

  5. Delta Airlines EXPANDED INCOME STATEMENT

  6. Net Enterprise Assets (NEA)

  7. Trend Analysis

  8. Net Financial Liabilities (NFL)

  9. Enterprise profit after tax (EPAT)

  10. Trend analysis (% of Sales)

  11. Financing expense after tax (FEAT)

  12. Enterprise Profit Margin (EPM)

  13. Valuation using cash flows • Calculating free cash flows • Cash flow valuation is used because the valuation is based on the opportunity to receive cash payoffs in the future • Determining the amount, timing and uncertainty of future payoffs can be challenging

  14. DCF Model

  15. DCF Model • Percentage of value captured in first six years: 32%

  16. Residual Enterprise income • REIt=EPATt-(rEnt*NEAt-1) • Residual enterprise income valuation model anchors the valuation on the current book value of net enterprise assets (NEA0) and future residual enterprise income serves as the adjustment to this valuation to counter the effect that accounting rules and procedures have on this valuation starting point • Residual income models look at the economic profitability of a firm rather than just its accounting profitability

  17. REI Model

  18. REI Model • Percentage of value captured in first six years: 66%

  19. Abnormal enterprise income growth MODEL • Agrt = (EPATt + (rEnt *FCFt-1)-((1+ rEnt)*EPATt-1)) • Anchor on earnings instead of book value like REI • Anchor is capitalized earnings • Accounting changes do not change value estimate

  20. AGR Model

  21. AGR Model • Percentage of value captured in first six years: 89%

  22. Delta Airlines • Higher operating margin than major big competitors (so earning more on each dollar of sales) • Higher EPS than major competitors • Higher net income (10.54B) than American Airlines Group (-1.83B) and United Continental Holdings (550M) • Delta has had higher passenger traffic due to growth in capacity • Expected to have an increase in sales for the first quarter of 2014 and lower costs

  23. Delta Airlines • Fleet restructuring: Delta has been replacing older planes that are less cost efficient with more cost efficient planes • Employee productivity improvements used to cut costs • Demand for air travel is increasing, Delta has been able to raise prices while increasing passenger traffic

  24. Recommendation • Buy • Calculated value of Delta is higher than the market value by $18,483 million • Analyst opinions: recommend buy or hold