Delta Air Lines (NYSE:DAL) could turn cash flow positive sometime early next year, at least according to one analyst. Investors in Delta Air Lines stock could see a nice jump in their holding once that happens.
A major reason for this is that these two big international airlines only need demand to reach 45% to 50% of their 2019 levels. This is much lower than other domestic airlines.
He believes that any international revenue will accrue straight to the bottom line for both Delta and United.
Cash Burn and Liquidity
On Oct. 13 Delta reported losses as expected, but more importantly, its cash burn was much lower than last quarter.
This is even better than United Airlines, which had an average of $25 million in cash burn, including principal debt repayments.
Moreover, Delta said its average cash burn during September was only $18 million, or 25% below the average for the quarter.
However, these figures do not include $813 million paid out in separation and early retirement programs for 18,000 people.
“We expect to average a daily cash burn rate of $10 million per day in the December month with good line of sight to positive cash flow by the spring,” said Delta CEO Ed Bastian on the conference call about the Q4 outlook related to cash burn.
Keep in mind that last quarter the company had led investors to believe that it would be cash flow positive by the end of the year. So, as might be expected, there is some slippage here.
Nevertheless, Delta is clearly talking about reaching positive cash flow within the next six months.
Moreover, at the end of Sept. Delta Air Lines reports it had $21.6 billion in liquidity. Assuming that it burns on average $2o million per day for 92 days, that would take down its liquidity by $1.84 billion.
In addition, the company says that it will pay out between $150 and $250 million during Q4 in restructuring charges. So total liquidity will still be ample at about $19.5 billion by the end of the year.
What Analysts Say About Delta
The problem with forecasts like this is that reality gets in the way. For example, just as it now looks like the company won’t be cash flow positive at the end of the year, the same could happen in the spring.
And it doesn’t help that Covid-19 cases are now on the rise in Europe, the UK and parts of the U.S. Analysts expect that a vaccine won’t be available on a widespread basis until early next year.
This means that it might actually take until the summer before the company is cash-flow positive.
Analysts believe that everything now depends on recovery in demand and traffic. For example, Cowen analyst Helane Becker told Reuters that Delta has now achieved much of its cost reduction objectives.
What to Do With Delta Stock
The Wall Street Journal summed it up perfectly: “What is bad for Delta is worse for other airlines.” The author talked about investors getting “whipsawed” with Covid-19, rescue package news, and traffic/demand results recently.
However, they suggested that at this low point, Delta Air Lines stock is a bargain. That is especially true if the company does indeed turn cash-flow positive early next year.
Moreover, TipRanks.com reports that 15 analysts have written about Delta in the past 3 months. Their average price target is $39.17. This represents a potential 27.8% gain over the price on Delta Air Lines stock on Oct. 30 of $30.64.
Similarly, Marketbeat.com reports that the consensus target price of 17 analysts for Delta is $45.47 per share. That represents a potential gain of 48.4% on today’s price. The average of these two is $42.42, or 38.12% upside.
Even if it takes to the end of 2022 to reach that price this represents an average annual gain of 16.1%. That is a very good ROI for most patient investors.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.