Delta (NYSE:DAL) has been performing quite well lately. That may surprise some investors, given the fact that we’re seeing a record number of novel coronavirus cases, both domestically and internationally. So, why is DAL stock performing so well?
It’s doing well simply because the stock market is a forward-looking mechanism. The market anticipates the economy returning to a more-normal state in 2021. Plus, the introduction of a Covid-19 vaccine should make things even better, allowing restaurants to open to larger capacities and for society to resume traveling.
Those two industries have been some of the hardest hit this year. Many businesses are in unrecoverable states due to the pandemic. And while some of the larger, public companies in this space have struggled, at least they will survive. The small- and medium-sized operations — the mom-and-pop shops of the world — will be lucky if they can say the same.
But since the second quarter lockdowns were lifted, the economy has come back stronger than many had anticipated. This has been a positive for DAL stock and its peers. Even amid the turmoil, it was one of the best-performing airline stocks.
The hope is that the economy can continue to tread higher until a vaccine becomes widely available. Then, it’s off to the races. That’s why Delta and so many others have been trading so well lately.
Breaking Down DAL Stock and the Airline Industry
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Of the five major airlines, DAL stock has been the second-best performing stock. That’s when measured on its year-to-date (YTD) and one-year performances. In those spans, shares are currently down 27.4% and 23.9%, respectively.
For comparison, the leader in those areas, Southwest Airlines (NYSE:LUV) is down nearly 14% and 16.3%, respectively. So, DAL does trail by a bit. However, its performance is still better than American Airlines (NASDAQ:AAL), for instance, which is down 38.5% YTD and 35.8% over the past 12 months.
I realize those are a lot of performance numbers, but let’s not get bogged down by them. Instead, we can simply use these numbers to illustrate the qualities that Delta brings to the table.
When looking at the chart above, it’s also clear that airline traffic has picked up lately. The Transportation Security Administration (TSA) has even logged more than 1 million travelers on four different days in the last few weeks. That number hasn’t been reached since mid-October, which was the first time since March that more than 1 million travelers were screened in a single day.
On one hand, this traffic increase is helping drive airline stocks higher. If travelers have been willing to travel now, think about what it will be like six, nine or 12 months from now as a Covid-19 vaccine becomes more prevalent.
But on the flip side, some data now suggests that bookings are experiencing weakness as the virus gains momentum again. Until the vaccine is readily available, there may be hesitation among consumers. That doesn’t seem to be bothering DAL stock, though.
Bottom Line on Delta
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I think there is a reason Delta is one of the best-performing airlines this year. What’s the secret? The company’s financials. Simply put, the airline has one of the strongest balance sheets — only lagging behind Southwest on that front.
That leads me to believe that it’s Delta’s financials doing the heavy lifting for the stock.
However, the recent slowdown in bookings is having a negative impact on daily cash burn. Delta expects to end the fourth quarter burning $12 million to $14 million per day. Even at the lower end of that range, it’s still about $1 billion for the quarter.
Yet, that is much better than the $27 million a day it was burning in June and even the $18 million a day it was burning in September. Further, management continues to target break-even operations by the spring. Really, that is just a few months from now — virtually no time at all in the grand scheme of things.
So, what do we do with DAL stock at this point? There will be dips in airline traffic as consumers react to new Covid-19 data. But with vaccines on the way, “normal” doesn’t seem all that far off — there is light at the end of the tunnel.
Buy the dips in DAL stock.
On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.
