Finance

Delta Air Lines, Inc. (DAL) vs. Tesla, Inc. (TSLA): Which is the Better Investment?

Delta Air Lines, Inc. (NYSE:DAL) shares are down more than -5.18% this year and recently decreased -0.71% or -$0.38 to settle at $53.10. Tesla, Inc. (NASDAQ:TSLA), on the other hand, is down -8.61% year to date as of 05/17/2018. It currently trades at $284.54 and has returned -6.71% during the past week.

Delta Air Lines, Inc. (NYSE:DAL) and Tesla, Inc. (NASDAQ:TSLA) are the two most active stocks in the Major Airlines industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.

Growth

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect DAL to grow earnings at a 12.00% annual rate over the next 5 years. Comparatively, TSLA is expected to grow at a 35.00% annual rate. All else equal, TSLA’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. Delta Air Lines, Inc. (DAL) has an EBITDA margin of 18.87%. This suggests that DAL underlying business is more profitable DAL’s ROI is 19.40% while TSLA has a ROI of -6.50%. The interpretation is that DAL’s business generates a higher return on investment than TSLA’s.

Cash Flow



Cash is king when it comes to investing. DAL’s free cash flow (“FCF”) per share for the trailing twelve months was -0.20. Comparatively, TSLA’s free cash flow per share was -6.66. On a percent-of-sales basis, DAL’s free cash flow was -0.34% while TSLA converted -9.62% of its revenues into cash flow. This means that, for a given level of sales, DAL is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios are important because they reveal the financial health of a company. DAL has a current ratio of 0.40 compared to 0.70 for TSLA. This means that TSLA can more easily cover its most immediate liabilities over the next twelve months. DAL’s debt-to-equity ratio is 0.69 versus a D/E of 2.42 for TSLA. TSLA is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

DAL trades at a forward P/E of 7.50, a P/B of 2.98, and a P/S of 0.89, compared to a forward P/E of 150.31, a P/B of 10.81, and a P/S of 3.95 for TSLA. DAL is the cheaper of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. DAL is currently priced at a -27.38% to its one-year price target of 73.12. Comparatively, TSLA is -10.22% relative to its price target of 316.92. This suggests that DAL is the better investment over the next year.

Risk and Volatility

Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. DAL has a beta of 1.06 and TSLA’s beta is 0.90. TSLA’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment




Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. DAL has a short ratio of 2.21 compared to a short interest of 5.02 for TSLA. This implies that the market is currently less bearish on the outlook for DAL.

Summary

Delta Air Lines, Inc. (NYSE:DAL) beats Tesla, Inc. (NASDAQ:TSLA) on a total of 11 of the 14 factors compared between the two stocks. DAL is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, DAL is the cheaper of the two stocks on an earnings, book value and sales basis, DAL is more undervalued relative to its price target. Finally, DAL has better sentiment signals based on short interest.

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