With a Fast Recovery Priced-In, Wait for Delta Stock to Go Lower

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As shares pull back after going parabolic, what’s next for Delta Airlines (NYSE:DAL)? Earlier this month, investors became extremely bullish that the hard-hit air travel industry would make a rapid “V-shaped recovery,” but with second novel coronavirus wave fears top of mind, it’s clear it’s still a long road to a comeback for the airline industry. Yet, this alone doesn’t rule out the merits of buying DAL stock.

With a Fast Recovery Priced-In, Wait for DAL Stock to Go Lower

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As I’ve said previously, this airline is much stronger than its legacy peers such as American Airlines (NASDAQ:AAL) and United Airlines (NASDAQ:UAL).

Even as shares trade 70% above their 52-week lows, Delta stock has less downside risk than with American or United. With a much stronger balance sheet, they may not have to raise more money at the levels seen with the other two.

That’s not to say that DAL stock offers you a great risk/return proposition right now, either. Even as investors have cooled off the stock in recent weeks, its current share price doesn’t provide sufficient runway for additional gains to account for still-lingering risks.

Taking this into account, today’s price (just below $30 per share) may not be a worthwhile entry point. But, if shares pullback further, shares may become more of a screaming buy, as things tilt more in your favor.

Has the Story Changed With DAL Stock?

With shares up much higher than where they were back in May, has much changed regarding this airline’s prospects? Taking a look at recent developments, I would say yes and no.

Take, for example, recent statements from Delta CEO Ed Bastian. Addressing shareholders at their annual meeting, Bastian said he expects the airline to reach breakeven by next spring. It’s not the best news, but it’s good we now have a clearer picture of the airline’s potential losses in the near-term.

But, given that airlines like American expect to reach zero cash burn by December, this airline’s forecast doesn’t exactly set the world on fire. Investors were already expecting airlines to lose money through 2020, and into 2021.

How about other key indicators? Taking a look at these, it again remains clear the airline has a long way to go. Revenue today is only at 15% of pre-pandemic levels. Air traffic levels have bounced back tremendously from their lows. But, they are still only 20% of their pre-coronavirus volume. And Delta doesn’t expect traffic to hit 30% of pre-outbreak levels until the end of the third calendar quarter.

In short, none of these recent stats provide much confidence that the airline’s situation has improved. The recent run-up is more due to speculative than actual improvement. And, because of the recent bounce back off its lows, Delta’s share price today fails to provide sufficient potential share price upside, relative to the amount of risk that’s still on the table.

Potential Gains Aren’t Worth the Risk

In his recent article on DAL stock, InvestorPlace’s Luke Lango laid out the bull case for the moribund airline’s shares. He cited improving travel numbers, as well as the airline’s potential profitability coming out of this crisis.

I agree with Lango that a comeback for Delta is more than possible. I don’t have the bankruptcy concerns with this airline that I do with more troubled rivals like American. But, the issue is not whether or not this airline “makes it” or not. It’s whether today’s valuation provides enough runway for shares to move higher to outweigh continued downside risks.

Running the numbers, Lango estimates the airline’s shares could be worth $45 per share by 2021, as its financials improve coming out of the crisis. This implies more than 50% upside from today’s prices.

Granted, that’s a nice return. Especially if it comes to fruition in one year’s time, but it’s no slam-dunk. With many risks still at play, shares could easily fall back to their prior lows. Or even lower, if the company’s finances continue to deteriorate. With this in mind, a potential 50% gain is not enough to trump these potential downside factors.

Wait Before Buying DAL Stock

For months, I have been cautious on all the legacy airlines’ shares. But, I agree that Delta may the strongest of the bunch. That being said, I don’t think the company is a strong buy at today’s prices.

Shares could head higher, as more positive developments become known. But, with many unknowns and risks still on the table, the potential share price downside exceeds the potential gains with this stock.

At lower prices, the risk/return proposition with DAL stock could be in your favor. But right now? It may be best to stay on the sidelines.

Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.

Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.


Article printed from InvestorPlace Media, https://investorplace.com/2020/06/fast-recovery-priced-wait-dal-stock/.

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