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Here’s Why Delta Is a Top Airline Stock to Buy

Delta Air Lines still faces long-term challenges, but is a top pick in the group

Airline stocks are trying to recover from the novel coronavirus sell-off. Naturally, some have done better than others as investors try to figure out which ones to own. On the list should be Delta Air Lines (NYSE:DAL), provided investors want to buy in this group. DAL stock is up about 50% from the May low, but is still down considerably from its high.

DAL Stock: Here’s Why Delta Is a Top Airline Stock to Buy
Source: Lerner Vadim / Shutterstock.com

Despite this big rally, Delta is still down 54% from the 2020 highs. Even though the industry is enjoying a nice run, the group has a ways to go before being out of the woods.

Airlines traffic is rebounding but is still down considerably year-over-year. As long as travel continues to heat up and we don’t have a second wave of Covid-19 triggering more lockdowns, then the industry will likely continue to rally.

A Look at Airlines

The industry faces a tough situation here. Not only did the coronavirus crush traffic in the short term, it’s creating a big problem for the group’s most profitable stretch. Whether it’s Delta, American Airlines (NASDAQ:AAL), United Airlines (NASDAQ:UAL) or another, these companies generally generate their best revenue and free cash flow in the second and third quarters.

Even though we’re seeing a notable rise in traffic, it’s still down considerably year-over-year. Not only does that cause a drag in revenue and earnings, but it also equates to a notable cash burn situation.

In its previous earnings report, Delta said it hopes to have its daily cash burn for the quarter down to $50 million a day.

The cash burn, loss of revenue and the time it will retake to regain pre-coronavirus capacity is why the stocks were hit so hard. It’s also what prompted Boeing’s (NYSE:BA) CEO to say it wouldn’t be a surprise if a U.S. airline went under this year.

He also predicted that the industry wouldn’t even recover 25% of its prior traffic levels by September.

But not everyone is a detractor. Barron’s recently said that Delta stock had upside, along with Southwest Airlines (NYSE:LUV). Among other reasons, they praised the companies’ balance sheet strength. Based on prior analysis, it’s true that LUV has solid financial footing.

That said, there’s a reason Warren Buffett bailed on the airlines. They may have short-term upside, but clearly, the Oracle doesn’t feel optimistic about the intermediate to long term.

Buy DAL Stock Now?

Why is DAL stock a better option than its peers? After all, Delta is still more than 50% off its 2020 high. However, that’s better than the 62% to 67.5% fall from the highs that we’ve seen in United, American and Spirit Airlines (NYSE:SAVE).

To be fair, Southwest is down less, “just” 41% from the 2020 highs.

While Delta has one of the stronger balance sheets out there and traditionally generates more free cash flow than all of its peers, these next few quarters will be rough. Q2 is the company’s best free cash flow quarter, while Q2 and Q3 are its best revenue quarters.

With less than a month less in Q2, clearly the financials will take a hit. It’s obvious that Q3 will suffer as well. The only hope in the intermediate term is that pent-up demand drives strong Q4 and Q1 results, although I wouldn’t hold my breath on that theory.

So where does that leave us?

Chart of DAL stock
Click to Enlarge
Source: Chart courtesy of StockCharts.com 

If you’re compelled to invest in airlines, DAL stock should be atop the list. It’s got a strong balance sheet and will feel the eventual positive effects of a return to normalcy. Although, one can expect a turbulent ride.

As for the technicals, here’s what investors should keep an eye on. See if DAL stock can push through the 23.6% retracement near $28. This level has been resistance thus far, despite the overall market rally.

Above that opens the door to $34.50, where Delta finds the 38.2% retracement. On a move lower, see that the 20-day and 50-day moving averages buoy shares.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. Kenwell held no position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/06/heres-why-delta-dal-stock-is-top-airline-to-buy/.

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