Delta Air Lines Dropping – What Comes Next?

Airlines are dropping again? Delta Air Lines (NYSE:DAL) fell nearly -12.6% in the last 5 trading days, which is significantly more than the broad market decline of -2.8% (S&P 500). What’s going wrong? The government aid to protect airline workers is set to expire at the end of this month. That was expected, but what makes it worrisome is that with the resurgence of infection in many European countries – there is the fear of renewed lockdown. So what does it mean for investors? Is the recent drop an indication to sell, or does it make the stock price even more attractive? Near term downside risk remains meaningful, but the current price is an attractive entry point from a long-term perspective.

We arrive at our conclusion by assessing Delta’s recent market movement from three perspectives:

1. Relative positioning in the market
2. Underlying financial trends, and
3. The output of the Trefis machine learning engine which looks at past patterns to predict near term behavior.

Our dashboard Big Movers: Delta Air Lines Moved -12.6% – What Next? lays this out.

What relative positioning suggests: Are you a value investor who identifies and invests in under-priced securities based on market comparisons? Then this might be important to you.

Delta Air Lines’ stock price decreased -40% this year, from $58.08 to $34.57, before moving -12.6% last week, and ending at $30.22. At the beginning of this year, Delta Air Lines’ trailing 12 month P/S ratio was 0.8. This figure decreased -19.5% to 0.65, before ending at 0.57. So the stock is certainly cheaper now, but the picture is incomplete without peer comparison. Compared to Delta Air Lines’ P/S multiple of 0.57, the figure for its peers United Airlines, Southwest Airlines, and American Airlines stands at 0.31, 1.35, and 0.19 respectively. So while Delta is doing better than United and American, it is being rewarded much less than Southwest. Overall, peer comparison suggests that there may not be much room to rebound in the near term.

What fundamentals suggest: Want to consider long term investment? Then pay attention here.

Delta Air Lines’ stock price decreased -12.6% last week. In comparison, the stock has increased 10% between 2017 and 2019, and has decreased -42.8% between 2017 and now. So not much return for investors even before the pandemic hit. Interestingly, this looks at odds with how the underlying financials have performed. Delta Air Lines’ revenue increased 14.3% from $41,138 Mil in 2017 to $47,007 Mil in 2019. For the last 12 months, this figure stood at $34,059 Mil, implying a decrease of -27.5% over 2019 numbers – but that’s due to the halt in operations driven by the pandemic. In addition, Delta Air Lines’ net margins increased 30.2% from 7.8% in 2017 to 10.1% in 2019. For the last 12 months, this figure stood at -10.7%. The crux is that Covid-19 disruption apart, Delta was growing its revenues consistently and improving its margins alongside, yet the market did not reward it much. But that story may change as the demand rebounds because the current price level, which is at half of what it was at the end of 2019, could be an attractive entry point.

What machine learning algorithm suggests: More interested in short term returns? Then you might want to give this perspective more weight.

Our AI engine analyzes past patterns in stock movements to predict near term behavior for a given level of movement in the recent period and suggests about a 27% probability of Delta Air Lines rebounding 10% over the next 21 trading days. Compared to this, the probability of dropping further by -10% is 30%, suggesting a greater likelihood of downside. Our detailed dashboard highlights the chances of Delta’s stock rising after a fall and should help you understand near-term return probabilities for different levels of movements.

Taking all 3 perspectives together, we believe that risk of downside remains high in the near term. But there is no doubt that there could be good returns in store for investors willing to wait out the lean demand period. But, what if you’re looking for a more balanced portfolio instead? Here’s a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

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