Ahead Of Earnings, Are More Gains Anticipated In Delta Airlines Stock?

As passenger numbers improved at TSA checkpoints over the past two months, Delta Airlines (NYSE: DAL) revised its first-quarter outlook in mid-March. While revenues are expected to be 60% below Q1 2019 levels, the likelihood of positive cash flow during the summer has pushed the stock from $40 in December to near $50 at present. Assisted by the government’s payroll support program, Delta reported $3.7 billion of operating cash outflow in 2020 – fairly lower than the $6 billion drop in the stock’s market capitalization since February 2020.

While the airline industry continues to face significant headwinds, Trefis believes that Delta Airlines is likely to report better-than-expected revenue and earnings for Q1 2021 which will result in the company’s stock trending higher this week. That said, we believe the stock has limited upside over the next several months given the risks associated with a fourth wave of the pandemic triggered by new virus strains. We highlight quarterly revenue trends for the company along with our estimates for Q1 2021 as well as full-year 2021 in an interactive dashboard, Delta Airlines Earnings Preview.

Delta Airlines has $27 billion of debt and $14 billion of cash on the balance sheet

In 2020, the company raised capital through multiple debt and equity offerings to support its huge daily cash burn figures. The company entered into the second round of payroll support in January 2021 due to a continued slump in air travel demand and further limited its operating losses. Stringent capital preservation measures, capex curtailments, and dividend suspension have supported Delta in maintaining a strong balance sheet with a bulk of long-term debt utilized to purchase short-term investments. In conformity with PSP-2 requirements, the company has suspended dividends and share repurchases until March 2022 and investors can only benefit from capital gains as travel demand recovers.

How has DAL stock fared in comparison to the S&P 500?

DAL stock declined from levels of around $58 in February 2020 (pre-crisis peak) to levels of around $22 in March 2020 (as the markets bottomed out), implying DAL stock lost 62% from its approximate pre-crisis peak. With the easing of restriction measures, the stock has more than doubled to near $50, but the newly imposed restriction measures in Europe and prevalence of the U.K. strain across the world are a concern for the travel industry. Thus, the stock is likely to observe headwinds in the near term.

The coronavirus pandemic has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for FedEx vs. Quest Diagnostics shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.

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