The airline industry staged an incredible run-up at the start of June 2020 after spending months in a trading range. But since then, trading volumes fell as Covid-19 infections rose in many parts of the U.S. This threatens the pace of a rebound in the airline sector. Delta Air Lines (NYSE:DAL) stands out the most. The company issued a dour outlook that sent DAL stock lower overall last week.
Delta held a virtual annual meeting last week. Importantly, it noted continued progress on lowering its daily cash burn. On the call, Chief Executive Officer Ed Bastian said that Delta could expect June’s cash burn to be approximately $30 million per day.”
This is a sharp improvement from March when the world started dealing with the pandemic and the government ordered a shut-down of businesses. It burned $100 million a day at the time. The company is forecasting a cash flow break-even in Spring 2021.
Delta lowered the cash burn by cutting costs and benefiting from better net sales trends. The CARES Act added $3.8 billion in payroll support. The airline will get another $1.6 billion by the end of July 2020. Plus, it raised $14 billion in financing since March.
A Closer Look at DAL Stock
Buying Delta shares at this time will prove a gamble. Investors cannot forecast in advance on whether passenger traffic will continue increasing. Plus, the alarming spike in coronavirus cases could slow the business re-opening phase across the United States.
This will, in turn, hurt business travel traffic. Customers who initially grew confident in an economic rebound will not book a vacation that involves air travel.
Delta’s positive inflection point will not appear until flight counts grow at a faster pace. CEO Ed Bastian said that it added 1,000 flights a day for July. In August, it will add 1,000 more flights. At a 55% to 60% domestic capacity (compared to a normal schedule), value investors may start buying Delta stock.
Delta trades at a price-to-earnings ratio in the 5.5 times range. Its forward P/E is nearly 10 times. These multiples reflect the downside risks in the near-term while accounting for the steady traffic growth ahead.
According to simplywall.st, DAL stock has a fair value of $37.74. Similarly, analysts have a $38.00 average price target. And on Stock Rover, the stock enjoys scores of over 80/100 on value, growth, and quality:
Considering that Delta’s surge to the $35 – $40 level did not last long at all, investors should exercise caution holding this stock for the long-term. Volatility may build, encouraging shareholders to reduce their position.
Restrictions for passengers that promote health and safety may hurt demand. But all airlines must consider the safety of its staff and the customers it serves. Banning passengers who refuse to wear masks is a necessity. Unless a passenger has a medical reason not to prevent the spread of coronavirus, everyone benefits from doing their part.
Chances are good that passengers will abide by the rules and will wear a mask. The lower the risks of catching the virus while on a flight, the better off the airline industry’s recovery will hold.
And although Delta has an unfavorable debt/equity profile, its leveraged balance sheet is not a near-term risk. The company added plenty of cash and cut costs. While investors should wait for a bigger dip before buying, Delta is a compelling turnaround story.
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.