Helpful miscellaneous articles
regarding our retirement plan and planning.
Like you, I review my retirement nestegg and plan from time to
time. Recently, I went though some
continued education for some credentials I maintain and it occurred to me that
we all could use a review about these issues.
So with your help, we will share and post articles and info that may be
helpful and of interest to many of you in this section.
Timeless
Ways to Protect Yourself From Inflation
By
Updated January 02, 2022
Reviewed by
Fact checked by
In addition to
death and taxes, inflation is another
phenomenon that we can expect with near certainty over a period of time.
The U.S. has
actually gone through many brief periods of deflation, but in general, economic
progress is accompanied by inflationary pressures. Inflation may occur when
there is too much money in the system, which leads to an escalation in the
price of goods. Of course, if a household's two primary sources of wealth
creation—asset and income appreciation—rise at a rate equal to or greater than
inflation, the negative effects of inflation are neutralized.
Yet, as we've
seen time and again, that usually is not the case. While the minimum wage has increased, the
overall price of goods has outpaced the average salary increases of recent
years.1
Practice
trading with virtual money
Find out
what a hypothetical investment would be worth today.
SELECT A STOCK
TSLA
TESLA INC
AAPL
APPLE INC
NKE
NIKE INC
AMZN
AMAZON.COM, INC
WMT
WALMART INC
SELECT
INVESTMENT AMOUNT
$
SELECT A
PURCHASE DATE
CALCULATE
The Worst Tax
Inflation is
often referred to as the "worst tax" because its effects go unnoticed
by most people. Hypothetically, earning 4% in a savings account while
inflation grows at 7% makes many feel 4% richer. In fact, they are 3%
poorer.
That's
why it's important for households and investors alike to understand the
causes and effects of inflation, and how to plan so as to ensure that their
assets maintain their purchasing power.
Here are three
investment approaches everyone should consider as ways of protecting their
hard-earned wealth from the ravages of inflation.
Although inflation may be less dramatic than a stock market
crash, it can be more devastating to your portfolio.
Invest in Stocks
Despite the
lack of confidence most people express about stocks, owning some equities can be a very good way to combat inflation. Think of your
household as a business. If a company cannot properly invest its money in
projects that will deliver a return above its costs, then it, too, will fall
victim to inflation. The basic premise of business success is that corporations
will sell their goods at increasing prices, which will lead to elevated revenues, earnings, and inevitably, stock prices.
Some of the
best stocks to own during inflation would be in companies that can increase their
prices naturally during inflationary periods. Commodity resource companies are
one example. Products like oil, grains, and metals enjoy pricing power during
periods of inflation. The prices of these items tend to go up as opposed to,
for example, the price of a computer, which is subject to manufacturer and
distributor price adjustments.
Still, price
increases aren't enough to protect against inflation. If a company experiences
rising expenses, price increases alone are not enough to maintain equity
appreciation. That's why grocery stores, which may benefit from an increase in
food prices, may also suffer from an increase in their cost of
goods sold.
Look to invest
in businesses such as commodity firms or
healthcare companies that possess the strongest profit margins and,
generally, the lowest cost of production. Finally, never underestimate the
value of dividends during periods of inflation. Dividends increase the total
return of a portfolio.
Invest in a Home
When done for
the right reasons, like buying a home to live in, real estate is always a good
investment. Problems occur when a buyer's goal is to flip the property they just
bought at a profit. Although experienced real estate investors are able to
find hidden values in
properties, the average person should focus on purchasing a home with the
intent of holding it, even if only for a few years. Real estate investments do
not typically generate a return within several months or weeks; they
require an extensive waiting period in order for values to increase.
As a home
buyer, unless you're paying cash, you're likely to put some money down and take
out a loan, known as a mortgage, for the remainder of the
purchase price. There are different types of mortgages—fixed-rate and
adjustable are the most common—but the underlying principle is the same. You
pay off a little of the principal each month until you're left with ownership
of a debt-free asset that should continue to appreciate over time.
If you get a
fixed-rate mortgage, you end up paying off future debt with cheaper currency if
rates increase. But if rates decrease, you're still responsible for the fixed
amount. Various factors should be taken into account in order to determine your
best mortgage option.
Like land,
home prices tend to increase in value on an average year-over-year basis.
It is true that real estate bubbles are
usually followed by correctional periods, sometimes causing homes to lose over
half of their value. Still, on average, housing prices tend to increase over
time, counteracting the effects of inflation.
Invest in Yourself
By
far the best investment you can make to be prepared for an uncertain
financial future is an investment in yourself. One that will increase your
future earning power.
This
investment begins with quality education and continues with keeping skills
up-to-date and learning new skills that will match those most needed in the not-too-distant future. Being able to stay on top of a business's changing needs may
not only help to inflation-proof your salary, but also recession-proof your
career.
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Delta Air Lines: High Risk
Or High Reward?
Nov. 18, 2022 5:44 PM ETDelta Air Lines, Inc. (DAL)AAL, LUV, UAL4 Comments
Summary
- In an analysis on Delta Air Lines back
in August this year, I asked if the reward was worth the risk when
evaluating whether to invest in the company.
- At that time, I rated the Delta Air
Lines stock as a sell. Now, about 3 months later, I will tell you if I
come to a different conclusion.
- At the current stock price of $35, my
DCF Model shows an expected compound annual rate of return of 10% for the
company.
- In my opinion, the reward is still not
worth the risk, as I continue to see strong risk factors for investors.
- For these reasons, I maintain my sell
rating for the Delta Air Lines stock.
- Delta
Air Lines (NYSE:NYSE:DAL) has competitive advantages, which
help the company to build an economic moat over its competitors.
- The
company’s global airlines network and high necessary capital expenditures
lead to the fact that it is difficult for new competitors to
enter the airline industry.
- Delta
Air Lines’ EBIT Margin of 5.82% is higher than the one of United Airlines (UAL) (EBIT Margin of 2.01%)
and Southwest Airlines (LUV) (0.03%), underlying the company’s relatively strong
competitive position.
- At
the current stock price, my DCF Model indicates an Internal Rate of Return
of 10%; however, I continue to see a large amount of risk attached to a
Delta Air Lines investment. This leads me to the conclusion that the
reward you can achieve from investing in the company is not worth the
risk.
- If you do decide
to invest in the airline industry, I would recommend that you only invest
a maximum of 3% of your overall investment portfolio.
Delta Air Lines’ Stock Performance
The S&P 500 has shown a performance of 54.38% in the past 5
years as shown in the graphic below. The performance of Delta Air Lines
(-30.82%) as well as the performance of other companies from the same industry
such as Southwest Airlines (-30.09%), United Airlines (-24.95%) and American
Airlines (NASDAQ:AAL) (-69.36%) are significantly inferior when compared to
the performance of the S&P 500.
Even if no direct conclusions for the future can be drawn from the
past, history has shown that an investment in the S&P 500 (which is
associated with less risk due to the broad diversification) has generated a
significantly better return than any investments in these airline companies.
This strengthens my investment thesis that the reward is not worth
the risk when deciding to invest in Delta Air Lines or the airline industry in
general.
Delta Air Lines’ 3Q22 Financial Results
Delta Air Lines delivered strong 3Q22 results: the company
presented an operating revenue of $12.8B, implying an increase of 3% when
compared to the same quarter of 2019. At the same time, the airline company
revealed an operating income of $1.5B, implying an operating margin of 11.6%.
Ed Bastian, Delta's chief executive officer, commented on these
results with the following words:
"With strong demand and a
return to best-in-class operational performance, we are ahead of our plan for
the year on profitability and expect to be free cash flow positive. We're
working towards full network restoration by summer of 2023, which supports a
meaningful step up in profitability and cash flow next year on our path to earn
over $7 of EPS and $4 billion of free cash flow in 2024."
The Competitive Advantages and Growth Drivers of Delta Air Lines
In my previous analysis on Delta Air Lines back
in August, I showed that the company disposes of strong competitive advantages.
Due to this, I will only briefly discuss its competitive advantages in this
analysis. Among others, I mentioned the company's global network as a
competitive advantage:
“The company's global network
contributes to a strong competitive advantage. Delta Air Lines serves over 130
countries and territories as well as over 800 destinations around the world. At
the end of 2021, Delta Air Lines offered more than 4,000 daily departures to
its customers. Furthermore, the company's global network is supported by a
fleet of about 1,200 aircraft that vary in size and capabilities. This gives
the company flexibility to adjust aircraft to its existing network.”
In addition to the above, I mentioned in the same analysis that these
competitive advantages help the company to build an economic moat over its
competitors:
“The global network of Delta Air
Lines and other existing airline companies in combination with high necessary
capital expenditures (such as for aircraft leases and leases of airport property
and other facilities) contribute to the fact that it's extremely difficult for
new competitors to enter the industry.”
From my perspective, these competitive advantages contribute to
the fact that new competitors are unable to enter the market, but I don’t
identify strong growth drivers for Delta Air Lines' business, which contributes
to my sell rating for the company.
The Valuation of Delta Air Lines
Discounted Cash Flow [DCF]-Model
I have used the DCF Model to determine the intrinsic value of
Delta Air Lines. The method calculates a fair value of $34.61 for the company.
Its current stock price of $35.00 gives Delta Air Lines a downside of 1.1%.
My calculations are based on these assumptions as presented below
(in $ millions except per share items):
Delta Air Lines |
|
Company Ticker |
DAL |
Tax Rate |
30.0% |
Discount Rate [WACC] |
10.5% |
Perpetual Growth Rate |
2% |
EV/EBITDA Multiple |
9.9x |
Current Price/Share |
$35.00 |
Shares Outstanding |
638,2 |
Debt |
$31,936 |
Cash |
$7,023 |
Capex |
$5,384 |
Source: The Author
Based on the above, I have calculated the following results for
Delta Air Lines:
Market
Value vs. Intrinsic Value
Delta Air Lines |
|
Market Value |
$35.00 |
Downside |
1.1% |
Intrinsic Value |
$34.61 |
Source: The Author
Internal Rate of Return for Delta Air Lines
Below you can find the Internal Rate of Return as according to my
DCF Model. I assumed different purchase prices for the Delta Air Lines stock.
At Delta Air Lines’ current stock price of $35.00, my DCF Model
indicates an Internal Rate of Return of approximately 10% for the company. (In
bold you can see the Internal Rate of Return for Delta Air Lines’ current stock
price of $35.00.)
Purchase Price of the Delta
Air Lines Stock |
Internal
Rate of Return as according to my DCF Model |
$22.50 |
15% |
$25.00 |
14% |
$27.50 |
13% |
$30.00 |
12% |
$32.50 |
11% |
$35.00 |
10% |
$37.50 |
9% |
$40.00 |
9% |
$42.50 |
8% |
$45.00 |
7% |
$47.50 |
6% |
Source: The Author
Please note that the Internal Rates of Return above are a result
of the calculations of my DCF Model and changing its assumptions could result
in different outcomes.
The fact that my DCF Model indicates an expected compound annual
rate of return of 10% for Delta Air Lines, strengthens my belief that the
reward is currently not worth the risk when considering an investment in the
company. For this reward, I see too many risk factors attached. Therefore, I
reiterate my sell rating in regards to the Delta Air Lines stock. In the Risk
section of this analysis, I will describe these risk factors in more detail.
Delta Air Lines’ Fundamentals in comparison to its competitors
such as Southwest Airlines, United Airlines and American Airlines
At this moment in time, Delta Air Lines has a similar market
capitalization to Southwest Airlines: while Delta Air Lines’ market
capitalization is $22.20B, Southwest Airlines’ is $22.41B. However, Delta Air
Lines’ market capitalization is significantly higher than United Airlines’
($14.39B) and American Airlines’ (9.54B).
Delta Air Lines’ current EBIT Margin of 5.82% is higher than both
United Airlines’ (2.01%) and American Airlines’ (0.03%), but lower than
Southwest Airlines’ (7.16%). The generally low EBIT Margins of these companies
from the airline industry provides proof that an investment in this sector
comes with high risk factors. Declining revenues can result in losses, which in
turn can increase the probability of bankruptcy.
When it comes to growth, we can see that Delta Air Lines is
slightly ahead of its competitors: while Delta Air Lines has shown a Revenue
Growth of 2.92% over the last five years [CAGR], Southwest Airlines’ is 1.60%,
United Airlines’ 1.74% and American Airlines’ 1.58%.
In terms of Valuation, Delta Air Lines is slightly more attractive
than most of its competitors: while Delta Air Lines has a P/E Non-GAAP [FWD]
Ratio of 12.13, Southwest Airlines’ is 16.75 and United Airlines’ is 20.68. At
the same time, Delta Air Lines’ P/E Non-GAAP [FWD] Ratio is 29.39% lower than
the sector median, which is 17.18.
When it comes to risk, it can be highlighted further that Delta
Air Lines has a high Total Debt to Equity Ratio of 695.77%, which is a strong
indicator that the risk of investing in the company is very high. This once
again reinforces my belief that the reward is not worth the risk when
considering an investment in Delta Air Lines. The company’s Debt to Equity
Ratio is significantly higher than that of Southwest Airlines (92.57%), but
lower than United Airlines' (783.50%).
Delta Air
Lines |
Southwest
Airlines |
United
Airlines |
American Airlines |
||
General
Information |
Ticker |
DAL |
LUV |
UAL |
AAL |
Sector |
Industrials |
Industrials |
Industrials |
Industrials |
|
Industry |
Airlines |
Airlines |
Airlines |
Airlines |
|
Market Cap |
22.20B |
22.41B |
14.39B |
9.54B |
|
Profitability |
EBIT Margin |
5.82% |
7.16% |
2.01% |
0.03% |
ROE |
2.25% |
7.81% |
-14.56% |
NM |
|
Valuation |
P/E Non-GAAP [FWD] |
12.13 |
16.75 |
20.68 |
- |
Growth |
Revenue Growth 3 Year [CAGR] |
0.22% |
0.43% |
-1.67% |
-0.13% |
Revenue Growth 5 Year [CAGR] |
2.92% |
1.60% |
1.74% |
1.58% |
|
EBIT Growth 3 Year [CAGR] |
-24.52% |
-19.37% |
-43.23% |
-84.55% |
|
Income
Statement |
Revenue |
46.62B |
22.69B |
40.75B |
45.21B |
EBITDA |
4.47B |
2.72B |
3.09B |
2.40B |
|
Balance Sheet |
Total Debt to Equity Ratio |
695.77% |
92.57% |
783.50% |
NM |
Source: Seeking Alpha
The High-Quality Company [HQC] Scorecard
"The HQC Scorecard aims to help investors identify companies
which are attractive long-term investments in terms of risk and reward."
Here, you can find a detailed description of how
the Scorecard works.
Overview of the Items on the HQC Scorecard
"In the graphic below, you can find the individual items and
weighting for each category of the HQC Scorecard. A score between 0 and 5 is
given (with 0 being the lowest rating and 5 the highest) for each item on the
Scorecard. Furthermore, you can see the conditions that must be met for each
point of every rated item."
Delta Air Lines is rated as moderately attractive in the
categories of Valuation (44/100) and Economic Moat (40/100). For Growth
(36/100), Financial Strength (33/100) and Profitability (20/100), the company
is rated as unattractive. Only in the category of Expected Return, is the
company rated as very attractive (80/100).
Delta Air Lines’ unattractive overall rating (39/100), validates
my opinion to rate the company as a sell at this moment in time.
Risk Factors
From my point of view, there are plenty of risk factors investors
should take into consideration when thinking about investing in Delta Air
Lines:
In my previous analysis on Delta Air Lines, I discussed that the
financial results of companies from the airline industry vary widely depending
on the price of aircraft fuel:
“Increases in the cost of crude oil could have an adverse effect on
the company's operating results. Over time, fuel prices have been highly
volatile. Proof of this is the fact that from 2019 to
2021 the company's average annual fuel price per gallon varied from $1.64 to
$2.02. Year to year variations ranged from a decrease of 19% to an increase of
23%, as according to the company.”
Furthermore, I mentioned in my previous analysis that Delta Air
Lines might see a situation in which it can not meet its obligations:
“Additionally, Delta Air Lines has a significant amount of
existing fixed obligations (which includes, among others, aircraft lease and
debt financings, leases of airport property and other facilities). A disruption
to its business operations (which could be, for example, caused by another
pandemic) might see a situation in which the company isn't able to meet its
obligations.”
I also explained that consumer behavior has changed as a result of
the pandemic and that I do not expect it to return to the previous level:
“It can be assumed that the number of flights will not return to
pre-pandemic levels in the future due to companies having recognized the
advantages of virtual meetings and are therefore more likely to save on travel expenses.
As according to Reuters, Amazon (NASDAQ:AMZN)
alone saved $1 billion in travel costs during the pandemic.”
In addition to the risk mentioned above, Delta Air Lines’ high
Total Debt to Equity Ratio of 695.77% and its relatively low EBIT Margin of
5.82% demonstrate the high risk that is attached to an investment in the
company. This relatively high number of risk factors increases my confidence in
the theory that Delta Air Lines should be rated as a sell.
The Bottom Line
At this moment in time, I consider that the reward is not worth
the risk when considering to invest in Delta Air Lines. In the Risk section of
this analysis, I mentioned a large amount of factors that you need to take into
account before investing in the company. At the current stock price of $35, my
DCF model demonstrates an expected compound annual rate of return of 10% for
Delta Air Lines. From my point of view, this reward is not worth the
aforementioned risks; underlying my sell rating for the company.
In general, I don’t see the airline industry as being very attractive from an
investors perspective. This is especially due to the high-risk factors for
airline companies in general; however, if you decide to invest in Delta Air
Lines or in another company from the industry, I would suggest that you limit
your investment to a maximum of 3% of your total investment portfolio.
This article was written by
In my analyses,
I aim to identify companies that have strong competitive advantages over their
competitors (for example, a strong brand image, cost advantages, special know
how, strong pricing power, a strong distribution network, etc.) in order to
support you to find excellent long-term investments. I aspire to help you build
an investment portfolio consisting of high-quality companies that are
particularly attractive in terms of risk and reward (for example, due to their
wide economic moat, high financial strength, high profitability, attractive
valuation, growth potential and expected return). I was born in Germany and
majored in Business Administration at the University of Mannheim (Germany) and
San Diego State University (United States).
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Disclosure: I/we have a beneficial long position in the
shares of AMZN either through stock ownership, options, or other derivatives. I wrote this article
myself, and it expresses my own opinions. I am not receiving compensation for
it (other than from Seeking Alpha). I have no business relationship with any
company whose stock is mentioned in this article.
(As with any of these informative articles,
anyone who needs someone to talk to about
this
very subject contact me and I can direct you to a knowledgeable advisor).
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