Delta Air Lines (NYSE:DAL) is having a vaccine rally. Since closing at $31.42 on Dec. 6, DAL stock is up nearly 36% (as of this writing).
The catalyst is several Covid-19 vaccines that could start being distributed in December.
However, as I see it, when it was trading at $31.42, DAL stock was nearly 100% above its 52-week low. Certainly the vaccine announcements bring an element of hope. But is that hope worth the current price? I think investors should temper their optimism.
It’s likely that the economy will face more restrictions. And the urgency (wink, wink) for a stop-gap stimulus bill highlights the fact that millions of Americans are facing difficult economic situations.
A Closer Look at AAL Stock
There is good news depending on your perspective. Passenger travel did climb over the Thanksgiving holiday. And while it was still 40% below 2019 levels, Delta and other airlines were in the unusual position of having to cancel flights because of staffing issues.
The vast majority of those flights were rescheduled, frequently on the same day. Some passengers may have felt like cancelled flights were a sign that air traffic is coming back.
However, if the latest Covid-19 figures are accurate, we probably have longer to wait.
Before I wrote this article, I wasn’t aware there was such a thing as regifting day. But we learn new things every day. Apparently December 24 has been designated national regifting day since 2006. Without a doubt, if the airlines could, they would regift the white elephant gift known as the novel coronavirus.
Recently the United States achieved the troubling milestone of over 100,000 hospitalizations for Covid-19. And this will give government officials reason enough to extend and/or expand mitigation efforts that are already in place in various states.
I don’t mean to depress anyone. It simply may take some time before Americans are back to what we consider to be business as usual.
When the CEO Speaks, It Pays to Listen
But why should you listen to me? Listen to what Delta is saying. According to Delta chief executive officer Ed Bastian, the company expects to have a cash burn of around $10 million per day in December. However on Dec. 3, the company acknowledged that its estimate was likely too low.
In fairness, that has had only a nominal impact on the DAL stock price. However, on the company’s most recent earnings call, Bastian remarked, “…we do believe it could still be two years or more until we achieve a normalized revenue environment.”
I am all for corporate candor. However, when a company makes a statement like that, you should heed the warning. Delta doesn’t perceive demand getting back to 2019 levels for another two years. Right now, you’re paying a share price that’s about 70% of the company’s 52-week high. But by its own admission, the company is only generating about 35% of the revenue (at best) that it was generating a year ago.
That’s shaky math for me, particularly while the company suspended its dividend. According to Bastian, Delta is forwarding its projection to hit its goal of positive cash flow until the spring. That means no dividend until the second half of next year.
And all of this is assuming that everything goes perfectly.
DAL Stock Will Be a Buy, Just Not Now
Delta continues to do what it takes to manage through the pandemic. They are slowing their burn rate. Reaching an agreement with the pilot union was another step in the right direction. None of this should be discounted. But it also doesn’t mean DAL stock is a bargain. As Dana Blankenhorn expands upon , Delta has a mound of debt to work through.
One day, hopefully sooner than later, the world will be flying again. That day can’t come soon enough for the major airlines. And when it does, I expect passenger traffic to increase faster than what is being forecast. Until then, I’d be careful not to pay too high of a vaccine premium on DAL stock. There may be some turbulent moments still to come.
On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Markoch is a freelance financial copywriter who has been covering the market for over six years. He has been writing for Investor Place since 2019.
