There’s a Bull Case for Delta in a Bear Market

DAL stock is poised to rebound quicker than other airlines

Recent events scared potential investors away from already reeling airlines. Investors know there is a massive buying opportunity afoot, but fear and volatility are clouding their decision processes. For instance, Delta (NYSE:DAL) stock is suffering greatly during the novel coronavirus pandemic.

Delta’s market capitalization remained around $35 billion since 2017, but after DAL stock dropped in the first quarter as passengers cancelled their bookings, its market cap is now about $13.5 billion.

Delta is down, but not out.  Although it has potential to be a great pickup, questions abound and any trepidation is understandable.

But there is ample reason to be a long-term bull on Delta stock.

The company’s stock price chart might strike fear into investors, and rightly so if you’re currently underwater. But the chart should lend optimism to investors with no current position in Delta stock.

At the time of this writing, DAL stock is around $20. Pre-coronavirus prices were hovering around low-$50s to low-$60s. Assuming a rebound in the coming years, a serious windfall should be there for investors.

A rebound to $40 per share means a 100% profit at current prices. Investors should be excited about Delta stock’s upside, and Delta’s position should provide reason to act on that excitement.

The so-called BEACH (Bookings, Entertainment, Airlines, Cruises, Hotels) stocks have been particularly hard-hit during the coronavirus. Delta has seen its share price drop precipitously. Investors know that stocks in these sectors have been pummeled and they’re interested in picking them up cheaply.

At the same time, they’re scared that unpredictable events could lower prices further.

As one such example, Berkshire Hathaway’s (NYSE:BRK.A,NYSE:BRK.B) Warren Buffett recently sold out his position in all airlines. Roughly a week later, Boeing (NYSE:BA) CEO Dave Calhoun exacerbated the already tense situation. Calhoun announced that he foresees air traffic failing to reach 25% of pre-coronavirus levels by September, perhaps rising to 50% by year-end. Calhoun further suggested that a major carrier could go under by the end of the year.

Though he didn’t explicitly mention the airline by name, American Airlines (NASDAQ:AAL) was the most logical suspect. Some found it odd that Calhoun should make such comments given that he is not the CEO of a carrier itself, but rather a supplier to the industry. Further, Calhoun could damage relationships with the very people he seeks to supply.

The net effect of this one-two punch was more fear and apprehension surrounding an already beleaguered industry and a battered Delta whose stock is at historic lows. 

What Kind of Turnaround Can DAL Stock Expect?

Delta sought to provide clarity regarding traffic expectations following Calhoun’s comments. The company responded by releasing a note regarding pilot cuts from which we can extrapolate potential air traffic in the same period.

Delta has 14,000 pilots. CEO Ed Bastian’s note stated that Delta expects to cut 7,000 of those pilots by the fourth quarter. Thus, we can assume Delta should be operating around 50% of the flights it was prior to the coronavirus pandemic in Q4. 

So, from that,  investors can gather some semblance of informed air-traffic expectations. Lower than 25% of previous levels seems highly unlikely. 

Investors next need to consider when revenues might potentially return to normal. Revenue drives investor returns. Fortunately, investors can use analyst expectations about future revenues to provide a base for potential returns. 

Analysts expect that Delta should anticipate $19 billion to $20 billion in revenue by 2020 year end. That figure increases to $35 billion in 2021, and roughly $38 billion by 2022.

Delta posted $47 billion in revenue in 2019, but that was a banner year. Investors should expect that buying into Delta’s turnaround via the carrier’s stock will require a holding period of a few years for prices to rebound.

Why Consider Delta Over Other Airlines?

Investors seeking to pick up undervalued airline stock at low prices have two choices: Delta or Southwest (NYSE:LUV). Both are relatively strong financially. There is little doubt at this time that either are at risk of bankruptcy.

Some investors could make a case for buying United (NASDAQ:UAL) as well, but I’d stay away as it is a poorer choice than Delta or Southwest. American is a no-go.

One of the main differentiating factors between Delta and Southwest is that the former was showing operating margin expansion while the later was showing a contraction. This bodes well for Delta.

Delta Can Weather the Storm Better Than Most

Delta has enough cash on hand to remain solvent for 10 to 11 months. Among major carriers, only Southwest is estimated to have more, at 16 months of coverage. Delta is among the best-situated airlines to ride out the storm.

Should another outbreak occur late in the year, the calculus of everything changes. Then perhaps it’s time to question which major airlines may go under. For now, such fear is unjustified.

Delta’s Excellent 2019

The company enjoyed a record 2019. Delta set new records for revenue ($47 billion), net income ($4.77 billion), and had a good load factor in 2019 (86.3%). It did so while increasing business and premium product sales 9% and loyalty revenue by $500 million to have what Bastian described as the company’s best year ever.

The company formerly had a mix of legacy fleets that was overly diversified, raising costs. Delta has enacted a plan to tackle the problem.

Fleet Reduction Will Help DAL Stock

The company prioritized fleet reductions during the pandemic that should ultimately improve efficiency and strengthen earnings. Delta operates 13 fleet families with a goal to reduce the number to eight. This will reduce maintenance costs and training costs among others, allowing more efficient operations. Delta’s stock should benefit. 

In 2019 Delta increased its sales of business and premium products by 9%. The stated aim is to raise business and premium seating to above 30% of capacity. This is part and parcel of the fleet optimization strategy: Fewer and more profitable fleet families paired with more profitable sales. The more successful Delta is in re-branding itself as premium, likely the higher revenue should rise. The same is true of its effort to pare down its fleet. 

Sure, there is a possibility to pick up DAL stock shares at an even lower price. Some investors will get lucky and buy then. Buy now because you and I can’t predict the absolute bottom. However, Delta and its stock looks to be best poised to turn around among the major carriers once things normalize.

As of this writing, Alex Sirois did not hold a position in any of the aforementioned securities.