Delta Air Lines (NYSE:DAL) management said on Oct. 13 it expects daily cash burn will be just $10 million per day. It expects to have positive cash flow by the spring and so continuing throughout the year. That implies that DAL stock is worth well more than today’s price.
In fact, a JPMorgan analyst recently wrote that both Delta and United Airlines (NASDAQ:UAL) would become profitable earlier than other airlines.
These two big international airlines need demand to reach just 45% to 50% of their 2019 levels. This is much lower than other domestic airlines. I highly suspect that they are close to that now.
One reason is that the latest TSA security checkpoint numbers show that traffic is starting to approach the low end of that range. For example, for the week ending Nov. 28, the total number of travelers was 40% of the total last year. During several of those days last week, traffic was up to 45%.
Moreover, with the arrival of several vaccines soon, traffic demand will likely pick up, despite lockdown restrictions mainly in the larger cities in the US. This will have the effect of pushing the company into positive free cash flow (FCF) status.
Let’s see if we can put together a simple model that puts a value on DAL stock. That way we can see if it is worth buying.
Valuing DAL Stock
One way to do this is to estimate its FCF yield by the end of the year. The FCF yield is the amount of FCF divided by the market capitalization.
For example, right now analysts polled by Seeking Alpha expect that revenue will be $27.45 billion in 2021. If we can estimate a future FCF margin, we then can estimate its expected FCF for 2021.
Last year Delta made $3.49 billion in FCF on revenues of $24.56 billion. That works out to a 14.2% FCF margin for 2019.
Let’s assume, to be conservative, that Delta will be FCF positive for only about half of the year. And it will take some time to get up to the 14% FCF level. For example, even if we use a 5% FCF margin, then Delta will make $1.3725 billion in FCF during 2021. If we use a 7% FCF margin or 50% of last year, then it will generate $1.9215 billion.
Therefore, if we assume that the stock will have an average 5% FCF yield, the market cap will be $27.45 billion. That is 5% higher than today’s $26.08 billion market cap at $41.06, as of Nov. 27.
Moreover, even at 50% of its normal FCF margin, and with a 5% FCF yield, DAL stock will have a $38.43 billion market cap by the end of 2021. That represents a potential gain of 47.4% over today’s price.
In other words, DAL stock is worth somewhere between 5% and 47.4% more than today, or 26.2% higher on average. That puts its value at least at $51.82 per share, and it could be worth as much as $60.50 (a 47.4% gain).
What to Do With DAL Stock
My model is a very simple way of looking at the potential value for DAL stock. Other analysts on the sell-side of Wall Street are not as sanguine about the company.
For example, TipRanks reports that 17 analysts have an average price target of $40.29. That represents a slight drop in DAL stock which is at $41.06, as of Nov. 27. Yahoo! Finance also reports the same price target for 20 analysts.
However, Marketbeat.com says that the consensus price target of 20 analysts is $46.05, or 12% above today’s price.
I wouldn’t put too much faith in these analysts. It is much better to derive your own simple model, which you can easily track or verify, just like I did above.
That way you can have more conviction should you buy the stock at today’s price. Moreover, once the stock hits your target you can reassess the situation using the same model in order to decide whether to sell.
Our very conservative model shows that DAL stock should rise by 26% to $51.82 or as much as 47% higher at $60.50 within the next year.
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.
Mark Hake runs the Total Yield Value Guide which you can review here.
