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Customers at Delta Air Lines, Inc. (DAL) are among the most satisfied of any legacy carrier and have provided the company with sustained pricing power.

While management projects operating losses in January and February, we expect an industry recovery to benefit results over the remainder of 2022. We believe that a "buy" rating is now appropriate. We caution that airline stocks are volatile and suitable only for risk-tolerant investors.

On Jan. 13, Delta posted adjusted Q4'21 earnings of $0.22 per share, down from $1.70 in pre-pandemic Q4'19 but above the consensus of $0.16. The higher-than-expected earnings reflected strong demand and pricing during the holiday period. On a GAAP basis, the company reported a loss of $0.64 per share, down from EPS of $1.71 in Q4'19.

Adjusted revenue of $9.47 billion topped the consensus estimate of $9.29 billion on a higher-than-expected yield. Adjusted total revenue per available seat mile (RASM) fell 6% to $0.163. In the fourth quarter, DAL posted positive cash flow of $555 million and negative free cash flow of $441 million.

Delta had $14.2 billion in liquidity at the end of Q4, including cash and cash equivalents, short-term investments, and an untapped credit line. Assuming that the cash burn declines, we expect it to end 2022 with liquidity of $14.4 billion.

Based on our expectations for earnings in the second, third and fourth quarters, we are maintaining our 2022 EPS estimate of $4.25 per share. We are setting a 2023 estimate of $5.25.

As earnings in the airline industry tend to be highly cyclical and volatile, we believe that airline stocks are most appropriate for speculative investors.

We are raising our rating on DAL from "hold" to "buy." We believe that the shares are undervalued at 9.4-times our 2022 EPS estimate, near the midpoint of the five-year historical range of 4.4-15.2. We think the current multiple inadequately reflects prospects for a recovery in the airline industry over the next two years.