Fundamental ViewAS OF 15 May 2023
DAL reached positive EBITDAR in 3Q21, now focusing on returning to and above 2019 profitability levels by the end of 2023 through continuation of strong leisure demand, ramp up of corporate, eventual full return of international markets, and successful structural cost cutting.
Capex for fleet rejuvenation is still relatively low as DAL seeks full IG ratings.
Business DescriptionAS OF 15 May 2023
- DAL is one of the world's largest airlines with a network comparable to UAL and AAL in size and distribution.
- DAL has an extensive global network of airline affiliations, including Air France/KLM, Virgin Atlantic, Aeromexico, LATAM, and China Eastern.
- 2019 revenue breakout was 72% domestic, 15% Atlantic, 7% LatAm, and 6% Pacific. Atlantic revovery has been strong with Pacific still lagging.
- DAL management is the most evolved of the US network airlines, previously focused on used aircraft to lower capital costs and setting up full-cycle maintenance programs, buying a refinery to hedge crack spread, and developing non-commodity products including the leading loyalty program.
Risk & CatalystsAS OF 15 May 2023
DAL faces all the industry exogenous risks: geopolitical events, pandemics, oil price volatility, and now recessionary fears.
DAL previously used its strong liquidity position to purchase a wide range of assets: equity in Virgin, GOL, Aeromexico, China Eastern, and LATAM; a refinery; used aircraft; and its own equity and pay dividends.
High fuel cost and potential for recessionary demand erosion are current issues.
Key MetricsAS OF 15 May 2023
|$ mn||LTM 1Q23||Y22||Y21||Y20|
|Interest and Aircraft Rent Coverage||4.5x||4.0x||-0.1x||-4.1x|
|Lease and Pension Adj Net Debt to EBITDAR||2.9x||3.4x||-95.5x||-4.4x|
CreditSights ViewAS OF 27 Jun 2023
Demand/supply imbalance still drives high fares, overcoming cost inflation headwinds. Yields has been running 20% above 2019 across the industry, driving record quarterly revenues. DAL 1Q23 EBITDAR lagged 1Q19, but total 2023 EBITDAR expected to reach 2019 levels. DAL CASM ex will decline later in the year as pilot headcount is restored and capacity grows to full operational utilization. Leverage will remain above pre COVID levels. We expect AAL spreads will continue to narrow relative to DAL.
Recommendation Reviewed: June 27, 2023
Recommendation Changed: January 04, 2022
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Fundamental ViewAS OF 16 Mar 2023
- Meta’s further reduction in total expenses for 2023 is a favorable development for creditors, and we expect operating leverage to drive meaningful EBITDA growth in 2024. Gross leverage is just 0.2x and the company has $31 bn net cash, although we do expect a significant decline in net cash as shareholder returns exceed FCF through year-end 2023.
- Meta previously boosted its share buyback authorization by $40 bn which indicates that the company will remain aggressive with repurchases and increases the odds it will come to market this year. The strong balance sheet and durability of its highly cash generative Family of Apps business are supportive in the medium-term although competition and regulation remain long-term concerns.
Business DescriptionAS OF 16 Mar 2023
- Meta Platforms is the largest social networking company in the world. Meta generates substantially all of its revenue from advertising on Facebook, Instagram, Messenger, and third-party affiliated websites or mobile applications.
- In 4Q22, Family of Apps was 98% of revenue (97.2% from advertising and 0.6% from other) and Reality Labs was 2% of revenue. Reality Labs generated $13.7 bn in operating losses during LTM 4Q22 as the company is investing heavily in the metaverse.
- Total MAUs and DAUs are 2,963 mn and 2,000 mn respectively at 4Q22. While US & Canada have the lowest number of users, they generate higher revenue than other regions given significantly higher ARPU. Revenue is 49% from US & Canada, 22% from Europe, 19% from Asia Pacific, and 11% from Rest of World.
- Meta is headquartered in Menlo Park, California. Employee headcount was 86.5k at 4Q22.
Risk & CatalystsAS OF 16 Mar 2023
- In December 2020, the FTC filed a lawsuit against Meta targeting its acquisitions of Instagram and Whatsapp. If Meta is forced to unwind prior acquisitions, this would be a credit negative given reduced scale and diversification.
- Meta’s Facebook and Instagram are uniquely exposed to rising competition from TikTok and other social media platforms. Meta is seeking to emulate TikTok’s success with its own short-from video product Reels. The US has again threatened to ban TikTok unless its Chinese owners divest its stake.
- Meta’s business model relies almost entirely on user-generated content. As such, there are risks related to customer privacy (e.g., Cambridge Analytica data scandal in 2018) and regulatory scrutiny.
- In October 2022, activist Altimeter Capital wrote a letter to Zuck and Board although we think it was on the friendly-side of activism and some suggestions have already been implemented.
Key MetricsAS OF 16 Mar 2023
|$ mn||2018||2019||2020||2021||LTM 4Q22|
|Revenue YoY %||37.4%||26.6%||21.6%||37.2%||(1.1%)|
|CapEx % of Sales||25.0%||22.1%||18.3%||16.3%||27.5%|
|Sh. Ret. % of CFO-CapEx||84%||20%||27%||116%||152%|
|EV / EBITDA||10.1x||15.5x||15.8x||14.0x||5.8x|
CreditSights ViewAS OF 22 May 2023
We came away from Meta’s 1Q23 results with increased confidence since advertising revenue is seeing a much sharper acceleration in growth than expected. We expect meaningful EBITDA growth in 2024 given improving revenue, tightly managed expenses given the layoffs and facilities consolidation, and lapping of $3-5 bn restructuring costs. Meta has $28 bn net cash at 1Q23, although we expect a significant decline in net cash as shareholder returns exceed FCF through year-end 2023. We estimate gross leverage of 0.4x pro forma for the recent $8.5 bn bond deal. Meta previously commented it will periodically access the debt markets although maintain positive or neutral net cash over time.
Recommendation Reviewed: May 22, 2023
Recommendation Changed: August 04, 2022