Delta Air Lines Stock Looks Attractive

+87.97%
Upside
29.57
Market
55.58
Trefis
DAL: Delta Air Lines logo
DAL
Delta Air Lines

The shares of Delta Air Lines (NYSE: DAL) continue to trade 25% below pre-Covid levels despite a sizable recovery in domestic air travel demand. The domestic business contributes almost 78% of total revenues and currently passenger numbers at TSA checkpoints are 20% below 2019 figures. Moreover, the third round of payroll support from the U.S. government is assisting employee salaries and mitigating losses through September 30, 2021. During this pandemic period, the company reported $3.1 billion of operating cash outflow – much lower than the $10 billion fall in DAL stock’s market capitalization. Thus, Trefis believes that the stock can observe strong gains as investors overlook pandemic losses. Our prior analysis, Pick Delta Over Southwest Airlines Stock To Extend Gains, highlights the key aspects in favor of an upside in DAL stock. Our interactive dashboard highlights Delta Air Lines stock performance during the current crisis with that during the 2008 recession.

2020 Coronavirus Crisis

Timeline of 2020 Crisis So Far:

  • 12/12/2019: Coronavirus cases first reported in China
  • 1/31/2020: WHO declares a global health emergency
  • 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
  • 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
  • From 3/24/2020: S&P 500 recovers 91% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system
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In contrast, here’s how DAL and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 1/1/2010: Initial recovery to levels before accelerated decline (around 9/1/2008)

Delta Air Lines vs S&P 500 Performance Over 2007-08 Financial Crisis

DAL stock declined from levels of around $18 in October 2007 (pre-crisis peak) to levels of around $5 in March 2009 (as the markets bottomed out). However, the stock gained significantly post-2008 crisis to levels of about $11 in early 2010 – rising by 126% between March 2009 and January 2010. In comparison, the S&P 500 Index first fell 51% in the wake of the recession before recovering 48% by January 2010.

Delta Air Lines’ Fundamentals Prior To The Pandemic Were Stable

Delta Air Lines’ revenues grew by 14% from $41 billion in 2017 to $47 billion in 2019, assisted by capacity growth and ticket prices. Moreover, the company’s margins improved due to lower operating costs and interest expenses. Thus, the EPS surged by 64% from $4.45 in 2017 to $7.32 in 2019. In 2020, the company’s revenues fell by 60% (y-o-y) as the capacity (ASMs) dropped by 51% and the passenger load factor plummeted to 55%.

CONCLUSION

Phases of Covid-19 crisis:

  • Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
  • Late-March 2020 onward: Social distancing measures + lockdowns
  • April 2020: Fed stimulus suppresses near-term survival anxiety
  • May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
  • Since late 2020: Weak quarterly results, but continued improvement in demand and progress with vaccine development buoy market sentiment

Another round of payroll support and the current trajectory of demand recovery are key factors for a strong upside in Delta Air Lines stock.

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