Finance - HL 344 (2)

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 

SHAM GAD

Updated January 02, 2022

Reviewed by 

ANDY SMITH

Fact checked by 

SUZANNE KVILHAUG

 

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

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Find out what a hypothetical investment would be worth today.

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 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.

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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.

David McNew

Investment Thesis

• 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.

Source: Seeking Alpha

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 According to the HQC Scorecard

Source: The Author

According to the HQC Scorecard, Delta Air Lines is rated as unattractive in terms of risk and reward, achieving an overall score of 39 out of 100 points.

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

Frederik Mueller

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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