The last time I wrote on Delta Air Lines (NYSE:DAL) stock, I urged investors to employ a wait-and-see approach despite weak second-quarter earnings. However, Delta is suffering from systemic issues that will see it lag the airline industry’s recovery. That’s not to say the company is in terrible shape. DAL stock is up substantially from its 52-week low of $17.51 a pop.
So there is something to smile about if you are a stockholder, but there are still several factors you need to know before investing in this one.
A significant chunk of the total passenger volume of Delta consists of business travelers. While TSA passenger numbers are going up, leisure travelers are still making up the bulk of the resurgence. That is a catch-22 situation for DAL. On one hand, the company will be happy that business is returning. But management will be significantly stressed because business travel is lagging leisure travel. And the former makes up half its revenue.
In detailing its financial results, Delta management said it was targeting break-even daily cash burn by the end of 2020. That’s also unlikely, considering most of the improvement has to come from volume growth instead of refunds.
I’m not saying that Delta is in danger of going under. But considering the issues identified, DAL stock will take a while to reach pre-pandemic levels. Such a recovery is unlikely within the next 12 months.
There are better alternatives available within the airline sector.
A Slow-Paced Recovery
Corporate travel makes up roughly 50% of Delta’s revenue. That is where the company is likely to face its stiffest challenge moving forward.
Although people have started to vacation more, business professionals are still skeptical of booking a flight to a nearby state. You can chalk that up partly to the novel coronavirus, but applications like Zoom (NASDAQ:ZM) and Slack (NYSE:WORK) became reliable alternatives for in-person meetings during this pandemic.
That much was acknowledged by Delta’s CEO Ed Bastian, who, in speaking to about the future of business travel, remarked:
“The international trips that we’ve all been on where we’ve flown over to Europe for a two-hour meeting and flown back that does nothing but beat you up, and you’d certainly be much easily better accommodated over a video call.”
Although I don’t believe that business travel will completely evaporate due to the pandemic, it’s sure to decrease substantially moving forward. Delta expects business travel to lag regular passenger flows by up to 18 months.
Cash Burn Targets Too Optimistic
At the end of the latest quarter, Delta was optimistic that it could reduce cash burn to break-even levels by year-end. Considering the weakness in business travel demand, that aim seems ambitious.
In its conference call, management said revenues will have to increase by $25 million per day to reach break-even levels.
A lot of that additional cash will have to come from volume growth. The company can probably squeeze out $5 million from refunds, anything beyond that would be a bonus. The company is looking to increase volume by 20% on the commercial side.
That’s a tricky proposition with Covid-19, but the target seems even more formidable when you take into account the lackluster business-travel scenario.
DAL Stock Valuation Isn’t the Point
DAL stock is still cheap at the moment, relative to its peers, but it will take a long time before shares reach pre-pandemic levels. The combination of slow passenger growth and a debt-laden balance sheet means that earnings estimates are optimistic at the moment.
We also don’t have anything substantial in the way of dividend yield.
In February, the airline decided to halt dividend payments to conserve cash for operations, and it’s up in the air when Delta will reinstate payouts.
Although its anyone’s guess, I don’t think that we will see dividends resume before 2021. The situation is too uncertain for the airline to take this step at this time.
The Bottom Line
DAL stock trades at under $28 a pop, reasonable considering the 12-month consensus per share price target is $35.50. But when investing, you always have to look at the larger picture. When purchasing DAL stock, you are essentially buying into its growth story, which is on weak legs right now.
No one will criticize you for buying this stock because of its history. But other red hot companies are making a comeback during this pandemic that may warrant your attention.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio. Faizan Farooque does not directly own the securities mentioned above.
