Should investors buy Delta Air Lines (NYSE:DAL) stock? It’s worth a look. Granted, the carrier faces a tough road ahead. As the novel coronavirus continues to depress air traffic, it could be years before things “get back to normal.”
But, relative to other airline stocks, like American Airlines (NASDAQ:AAL), the risk/return ratio of Delta looks positive.
The carrier’s aggressive cost-cutting is one reason for that. Not only is it helping the airline ride out today’s trouble, but the cost reductions could help it improve its competitive edge over the next decade.
DAL stock looks like the best name to buy in the sector. Although the shares could retreat to their prior lows, today’s prices may look like a steal in hindsight.
Why Buy DAL Stock Now?
After June’s Robinhood-driven airline-stock rally, interest in the sector has fizzled out.
Yet today’s prices may be a solid entry point for long-term investors. The worst may already be priced into DAL stock. The carrier has taken a proactive approach to cost-cutting and restructuring. And there’s a good chance that this airline has stronger prospects than many investors assume.
As InvestorPlace columnist Faizan Farooque wrote in his Aug. 3 column, Delta has successfully cut a significant amount of its costs . The airline has lowered its cash-burn rate from $100 million per day to $27 million per day.
Delta’s aggressive cost-slashing has helped the carrier by extending the amount of time that the airline can stay afloat if ticket sales fail to improve in the next year.
Secondly, the massive cost cutting and restructuring efforts could help Delta over the long-term. And as I noted last month, the airline has simplified its fleet.
In several years, the moves it’s making now could save it billions of dollars per year. With lower operating costs, the carrier will have an edge against its older rivals American and United Airlines (NASDAQ:UAL), and it will also be in a better position to compete with low-cost rivals like JetBlue (NASDAQ:JBLU) and Southwest (NYSE:LUV)
Considering these factors, it’s easy to see why Wall Street analysts remain bullish on DAL stock. But that doesn’t necessarily mean that the skies will be clear for Delta in the near-term.
It’s Tough to Call a Bottom
As InvestorPlace columnist Chris Markoch wrote late last month, the pandemic is entirely out of the airlines’ control. They can cut costs all they want, but air traffic won’t bounce back until the virus is in the rear-view mirror. And it may take a vaccine for that to happen.
With that in mind, if the current situation continues, investors may be able to buy DAL stock at lower prices down the road than now.
But it’s impossible to determine when stocks have bottomed. The best investors can hope for is to enter a stock at a price in which the risk/return ratio is positive. And that’s the case right now with Delta’s shares. Even if it takes several years for the carrier to “return to normal,” the shares’ potential return may exceed their downside risk.
Let’s say that, by 2022, the airline is back on its feet and the shares move back to $60 per share, which is where they traded before the pandemic. That’s a return of more than 100% in about two years. But it’s possible that air travel will remain depressed into 2021, while the carrier will continue to burn around $800 million per month, which is its current cash-burn rate.
That could send DAL stock back to its lows or worse. But I don’t think the company could go bankrupt. In short, there’s a better chance of the shares bouncing back to $60 than tumbling to zero.
DAL Stock Has Reached a Solid Entry Point
Is Delta’s stock a “bottom-fisher’s buy” at today’s prices? Not exactly. After bouncing back off its lows, there’s now a risk of the shares pulling back further. That will happen if air-traffic demand remains stuck at today’s depressed levels.
But the carrier’s proactive approach to cost-cutting could pay off, both before and after air travel “returns to normal.”Even if the shares fail to deliver in the near-term, their long-term potential appreciation may vastly exceed their downside risk.
In short, DAL stock remains one of the best ways to bet on a comeback by the airlines. And buying a small amount of the stock at its current levels makes sense.
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.
