Speculators that bet on airline stocks bottoming in March needed to wait until last week for the trade to pay off. The encouragement that flight bookings and passenger traffic are on the rise rewarded Delta Airlines (NYSE:DAL) shareholders. DAL stock also has valuations are too compelling to ignore. This might explain why the recent rally unfolded.
What about Delta’s fundamentals? The near-term prospects still look poor, even if bookings are slowly improving.
DAL Stock Lifted by Flight Schedule
In early May, Delta consolidated various operations in the U.S. served by multiple airports. This will align flight supply with weaker demand but would maintain the airliner’s connectivity. The company already planned to add more flights to its Atlanta and New York schedule. It also planned to increase its services in the Caribbean and Latin America. But most importantly, Bill Lentsch, Delta’s chief customer experience officer, said that “our survey data showed a clear desire for these kits and we have a bias toward action when we see new trends emerge.”
The inevitable rebound in passenger flight volumes, even though they are at a fraction of last year’s level, will introduce a big problem for air carriers. Travelers will have to wear a mask while onboard but maintaining social distancing will still present a challenge for everyone. Delta may lead the initiative in keeping planes disinfected between flights. For example, it may use ultraviolet light and scrub down the interior of the plane. Airline staff will wear protective gear and masks at all times and minimize close contact with passengers.
Excessive Speculation
The 88% bounce in LATAM Airlines (NYSE:LTM) last week suggests that excessive speculation in the sector lifted values only for now. Amateur stock buyers who do not know what a bankruptcy means bought LTM stock. When the firm files for bankruptcy, shareholders will get nothing back. Conversely, markets may be speculating that a delay in the filing, to at least July, increases the odds of a bailout from Brazil. Still, Brazil’s currency is collapsing and the country has too much debt to help the airline.
Delta and the Brazilian carrier signed a trans-American joint venture agreement earlier in May. The deal gives its customers connected flights between Delta and LATAM flights in hub airports where the two carriers are co-located.
Valuation
Wall Street analysts have a $36 price target on Delta stock (per Tipranks). Supporting that price target is the stock’s deep value score of 88/100:
| DAL | Industry | S&P 500 | |
| Value Score | 88 | 70 | 73 |
| Price / Earnings | 6.4 | – | 27.5 |
| Price / Sales | 0.5 | 0.3 | 2.3 |
| Price / Free Cash Flow | 9.5 | 10 | 21.9 |
| Price / Book | 1.5 | 1.3 | 3.8 |
Data courtesy of Stock Rover
Even after last week’s sharp bounce, Delta trades at a steep discount compared to the S&P 500 index. The stock market is still pricing in a weak recovery in revenue and investors expect the company to continue losing money. The stock is of high quality, although gross margins trail the index.
| DAL | Industry | S&P 500 | |
| Quality Score | 82 | 55 | 79 |
| Gross Margin | 19.90% | 20.80% | 29.10% |
| Operating Margin | 11.50% | 6.10% | 13.20% |
| Net Margin | 7.80% | 1.50% | 8.70% |
Data courtesy of Stock Rover
Investors cannot expect profitability recovering until passenger traffic rebounds to at least 25-50% of last year’s levels. Delta grounded most of its planes and cut operating costs and staff. So, if demand picks up at a faster pace, the company may quickly increase supply to match demand levels.
Avoid Chasing
Investors betting on Delta’s rebound weeks ago get to cash in on the reward now. Those who missed the rally should avoid chasing the stock.
The airline will post another ugly loss in the next quarterly report. But if bookings are on a consistent rise, Delta may have enough data to establish revenue guidance for the rest of the year. That will only help the stock hold its levels.
Chris Lau, contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.
