Delta Stock Is Rocky Now, But the Long-Term Payoff Is Huge

I’m glad I changed my mind on Delta Air Lines (NYSE:DAL) stock in my last article. On June 1, 2020, I wrote, “Delta Air Lines Stock Will Climb As Travelers Return to the Sky,” predicted a turnaround in DAL stock.

Delta (DAL) Stock Is Rocky Now, But the Long-Term Payoff Is Huge
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At the time, the stock was at $25.21 on May 29. By Friday, the stock closed at $30.43. That represents a gain of 20.7%. Even, if you start with the closing price on June 1 of $26.27, the return for any reader of that article has been 16.3%.

My point is that Delta seems to have reached an inflection point. The stock has moved around a good deal since that article, but the bottom line is that it seems to have bottomed out.

Now I am predicting that the same rebound will continue. I expect that Delta will continue to show gains over the next several months, and here’s why:

DAL Stock: Delta Will Likely Trend Higher

First, I believe that the market is beginning to accept that the company will not go bankrupt. It seems to have enough liquidity to last through the hard times of severely reduced revenue.

As I pointed out in my last article, the company’s cash burn was at $50 million per day as of mid-May. It expects to get down to $40 million per day by the end of June. Ultimately, it expects to get down to zero cash burn by the end of the year. This would largely be due to a huge pickup in airline travel demand. I pointed out that most of the major airlines expect the same thing.

Second, it appears that travel demand is clearly picking up. For example, if you go to the TSA’s checkpoint travel site, traffic can be seen to be improving. The numbers show airport traffic was down 81% on June 11 from last year. But a month ago, on May 11, traffic was worse, at off 91.4%. On April 11, traffic was at 95.4% of the prior year. In other words, the numbers seem to be improving by 10 percentage points a month and are accelerating on the upside.

Third, analysts are getting more positive on Delta stock. Seeking Alpha says that 15 analysts now project average earnings per share of $3.65 in 2021, after an expected loss in 2020. That puts DAL stock on a forward price-earnings ratio of just 8.3 times earnings. That seems pretty cheap. It implies that the stock could move further higher as travel traffic picks up over the summer.

What to Do With Delta

There is no question this is a cyclical stock. It is going to move around with the sector and major news in the sector. For example, on Friday there was news that American Airlines (NASDAQ:AAL) came out with an 8-K SEC filing “Operational and Financing Update.”

The company said it has now gotten its burn rate down to $40 million per day by the end of June. It also expects to have zero cash burn by the end of 2020. Both of these are what Delta expects to be doing. So both stocks moved up.

In other words, the fact that one airline looks to survive is positive for the other airline stock. Analysts figure the companies are taking similar measures to cut costs, expenses, capital budgets and, of course, financial expenses. What’s good for the goose is good for the gander in this industry.

Look to buy more shares in Delta if you are willing to take on the cyclical and day-to-day trading risk in the stock. I suspect that over the next year, you will be well rewarded, in spite of having some down days.

As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here.


Article printed from InvestorPlace Media, https://investorplace.com/2020/06/dal-stock-rebound-airline-travel-returns/.

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