[Editor’s Note: “Stay on the Sidelines While Delta (DAL) Stock Is Up in the Air” was originally published April 13, 2020. It is regularly updated to include the most relevant information.]
With airline shares pulling back, what’s next for Delta Air Lines (NYSE:DAL) stock? “Second wave” novel coronavirus concerns are starting to take hold. The recent bullishness for a V-shaped sector recovery looks more than a long-shot right now.
Is this latest development a mere hiccup, or a sign that tough times will continue? It’s debatable. On one hand, the airline industry is fast adapting to the “new normal.” On the other hand, even if the pandemic continues to fade, it could be years until a rebound happens, as some industry leaders have predicted.
Yet, while airline stocks remain risky, Delta may be a cautious way to bet on a sooner-than-expected recovery for the industry.
Why? Some analysts see Delta as relatively stronger than legacy rivals like American Airlines (NASDAQ:AAL) and United Airlines (NASDAQ:UAL). Sure, some see it differently, as their financial situation overall remains precarious. But, as the “best of the worst,” shares may still be a worthwhile buy.
Let’s dive in, and see why it could be a shrewd move in hindsight to jump in if prices continue to pull back from here.
What’s Next for DAL Stock After Covid-19?
The three major legacy airlines, American, Delta, and United, all face big trouble from the coronavirus. With the lion’s share of their routes inactive, cash is quickly flying out of the window.
Previously, Stifel’s Joseph DeNardi cited Delta as being financially stronger relative to rivals like American.
But now, it’s tougher to make such an upbeat case. As InvestorPlace’s Will Ashworth wrote Jun 24, bankruptcy is still a possibility for the carrier. Even upcoming cash burn reductions may not be enough to keep them out of Chapter 11.
Or is it? Despite the high risks, they may have enough capital to wait things out. According to Raymond James’ Savanthi Syth, the company has about 11 months of liquidity. And, given consumers on average have said they’ll wait another 7.5 months before hopping on a plane, that may be enough to ride out near-term depressed air travel levels.
However, a swift recovery remains a long shot. It may be up to five years before airlines recover from the coronavirus. Also, airline stocks could pull back again on the heels of additional bad news. Air travel may be slowly returning. But, with flights no more than 60% full, profitability will remain a challenge.
Did Airline Stocks Get Ahead of Themselves?
Back in April, Warren Buffett sold Berkshire Hathaway’s (NYSE:BRK.A, NYSE:BRK.B) stake in DAL, along with other airline stocks like American, United, and Southwest Airlines (NYSE:LUV). At the time, investors saw it as a clear sign that the industry’s near-term prospects were bleak.
Yet, this bearish forecast took a 180 in early June, as investors piled back into hard-hit stocks, especially airlines. Delta shares more than doubled off their lows, as speculation of a rapid airline recovery pushed shares significantly higher.
But, as this commentator noted, whether investors should be bullish or bearish on airline stocks remains up for debate. The airlines were much more resilient going into this crisis than they’ve been in prior major downturns.
However, even if domestic leisure travels quickly bounces back, international and corporate travel could still remain depressed. In short, it’s still too early to tell whether Buffett sold at the bottom, or if airline stocks could fall further if tough times continue.
However, additional pullbacks may not rule out DAL stock as a buying opportunity. If shares fall further, they may be worth the risk.
Keep DAL Stock On Your Radar, Even If Things Remain Up in the Air
Delta is relatively stronger than its legacy rivals. But it’s all relative. With billions flying out the door each month due to the coronavirus, the company faces a tough road ahead. Travel demand may be slowly bouncing back. But that doesn’t mean a swift return to profitability.
Yet, if bleak prospects get priced back into shares, we could reach a compelling entry point. Sure, high risk remains on the table. But, Delta stock may be the most cautious way to play this still hard-hit sector.
Thomas Niel, contributor to InvestorPlace, has written single-stock analysis for web-based publications since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.