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Don’t Rush to Buy Delta Stock Right Now

Delta struggled to recover from the Great Recession. The post-pandemic recovery will be even tougher.

Delta Air Lines (NYSE:DAL) shares have showed little in the way of growth over the past two years. And with the novel coronavirus, DAL stock has absolutely tanked.

DAL stock
Source: NextNewMedia / Shutterstock.com

In the two months since the market took a historic plunge, DAL stock has struggled to put together anything resembling a recovery. In fact, despite securing CARES Act funding, for several days in May, DAL closed lower than in March.

Any recovery is dependent on finding an effective vaccine. Even then, who knows if anyone will be flying? Meanwhile, you can definitely say goodbye to dividends.

Currently trading at the $25 level (compared to over $62 in January), you’d be forgiven for being tempted by DAL stock. Don’t give in. The foreseeable future looks grim for Delta.

Looking in the Rear-View Mirror

To get some idea of what’s in store for DAL stock, have a look at what happened as a result of the Great Recession. Cash-strapped consumers and businesses cut costs, and that led to lower demand for flights. By the end of 2008, Delta was cutting international and domestic flights. The American airline industry lost $24 billion at the height of the Great Recession and took years to return to profitability.

By June 2008, DAL shares were trading for under $6. At its low point in 2009, the stock had dropped over 80% from 2007 levels. Growth was relatively flat for the next five years. Delta stock didn’t start gaining ground in a meaningful way until 2013. 

The situation today has echoes of the Great Recession. At the low point — at least thus far far — in this crisis, DAL has dropped nearly 70% from January levels. Since March, it’s been unable to kickstart a recovery. 

But the pandemic is going to be even tougher to bounce back from — even assuming a Covid-19 vaccine is found. We’re facing a recession, if not an outright depression. That will cut demand for leisure flights.

People don’t fly when they’re laid off, or even when they’re worried about being laid off. They drive. Business travel is likely to decline as well. Companies will be in cost-cutting mode, and thanks to video conferencing, they’re liable to trim business travel permanently. Good news for Zoom Video Communications (NASDAQ:ZM), not so much for the airline industry.

Given Delta’s experience in the aftermath of the Great Recession, don’t expect a miracle recovery this time around. 

CARES Funding Comes With a Catch

Delta announced it was suspending dividends and its stock repurchase program back in March. That was bad news from an investor standpoint. 

In April, Delta secured government assistance in the form of CARES Act funding. Delta receives $5.4 billion, including $1.6 billion in low-interest financing. But that lifeline came at a cost. The government has the option of buying up to 1% of DAL stock at $24.39 per share over the next five years. Dividends and stock buybacks are officially out. Delta has to keep servicing its domestic routes, and it can’t lay off workers or slash their pay until Sept. 30.

That government cash will keep Delta flying through the summer. But the terms and conditions make the battered stock even less attractive as an investment.

Bottom Line on DAL Stock

The last time Delta ran into a global crisis, its stock dropped 80% then took half a decade to recover and return to growth. This time around, the recovery is likely to take longer.

In the wake of the coronavirus, air travel may simply never return to previous levels. Then there’s the added debt Delta has been piling on to weather the crisis, and the terms of government assistance — including the elimination of dividends and stock buybacks.

Nothing in there says this investment would be a good idea.

You shouldn’t be rushing out to buy DAL stock, even if it is discounted nearly 70% compared to January.

Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.


Article printed from InvestorPlace Media, https://investorplace.com/2020/05/dont-rush-buy-delta-dal-stock-now/.

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