Is Delta Stock Undervalued? - Financhill

Is Delta Stock Undervalued?

Is Delta Stock Undervalued? Delta Air Lines, Ince (NYSE:DAL) had a rough 2020, along with all airlines. It’s estimated by the International Air Transport Association to be the worst year in history, with the industry posting a net loss of $84.3 billion for the year.

Still, the company snagged a $5.4 billion bailout in April (which includes $1.6 billion in low-interest loans). It doubled down with another $6.5 billion in bonds and loans backed by its frequent flier programs. With mounting debt and crushed revenues, it’s no wonder the stock still hasn’t recovered from the coronavirus crash.

But is Delta stock undervalued?

It already almost doubled from its 52-week low of $17.51, and it’s still a far cry from the $50-60 range its been trading at for the back half of the 2010s. If things return to “normal” by the end of 2021, investors could be buying in at a discount at the current $30-35 price.

But that’s a big assumption, and there’s no guarantee life will get back to normal any time soon for the beleaguered company, no matter how much CEO Ed Bastian hopes it’ll bounce back.

First, we uncover how Delta is navigating through the turbulent economy in the aftermath of the global pandemic.

Why Delta Stock Is Down

There’s one good reason Delta stock is down – the coronavirus outbreak decimated the airline industry. The slow road to recovery is still ongoing, and the company is struggling like everyone else to make ends meet.

This pushed the company to shift staffing to meet the changing needs. Approximately 17,000 Delta employees (about one fifth of the staff) accepted early retirement packages, and management is being shifted to other divisions to help manage workloads and operating costs.

Although its market cap has grown since, it’s having trouble maintaining its $20 billion market cap after reporting two quarters of losses. This caused the company (and industry) to underperform the general market in the second half of 2020.

With the flu season looming and a viable vaccine candidate yet to be identified, it’s unclear how holiday travel will pick up. Delta is still generating revenue, but it’s hemorrhaging cash, leaving investors wondering when (or even if) the airline will recover.

Even with travel picking up, social distancing guidelines mean planes will be flying with lower capacity. It’s going to be difficult to push profits, and the company’s stock price is still half its normal price during the last half of the 2010s. 

Delta Financials & Cash Are Nosediving

Delta’s most recent financial report in October 2020 showed it has a GAAP pre-tax loss of $6.9 billion for the quarter, equating to -$8.47 per share.

Its total revenue was $3.1 billion, and it spent $4.0 billion directly on its COVID-19 impact and response. The company’s operating revenue of $2.6 billion represents a 79 percent dip from the same time in the prior year.

The company is still heading into the fourth quarter with $21.6 billion in liquidity, and the CEO indicated Delta is buckling down and preparing to be smaller through 2022.

This includes slowing its aircraft purchases down by $2 billion in 2020 and over $5 billion for the next two years. This is just one part of the company’s $5.5 billion operating expense decrease for the September 2020 quarter. 

Its cash burn dropped from $27 million a day in June to $18 million a day in September, so these measures are having a good effect.

It’s also branching out through ancillary businesses, like its loyalty programs and stake in the private jet industry. When it sold its Private Jets division to Wheels Up, it received a 27 percent equity stake in the company it recorded as a $240 million gain.

These steps have investors wondering if Delta’s valuation is too low.

Is Delta Valuation Too Low?

Although it’s struggling now, Delta is still generating revenue. It also has the cash to hold out for several years, despite being crippled when government-mandated travel restrictions choked the company’s revenues by 95 percent.

Competitor American Airlines (NASDAQ:AAL) drove itself deeper in debt in the year, raising $2 billion by selling 74.1 million shares of its common stock and pulling a $4.75 billion Treasury loan.

This may have a larger financial impact on AA, especially since it has more operating costs.

And while we focus on 2020 being a difficult year because of the coronavirus crash, its effects will last long into 2021. The steps Delta is taking now will keep it running as a smaller company through those rough times.

Its restructuring is meant to keep the company stable as it slowly pulls its stock back up to its normal cruising altitude. It has a good chance of doing it, as passenger volumes steadily rose each quarter in 2020. But steady isn’t necessarily a rise in price.

Will Delta Stock Rise?

Analysts who follow Delta expect the company’s revenue will hit in the range of $27.8 billion in 2021.

This is assuming revenues and travel pick up in the summer of 2021. It’s unlikely to rise until then, and the company’s c-suite is heavily focused on slowing down its cash burn so the company recovers as quickly as possible over the next two to three years.

If you’re seeking a long-term investment, Delta has great prospects. There’s a great chance its value will experiencing turbulence through the first half of 2021 though, so buying dips and holding tight may be stressful for some.

Is Delta Stock Undervalued? The Bottom Line

Delta Airlines is struggling along with the entire air industry due to coronavirus travel restrictions.

At its lowest, the company’s stock crashed to $17.51 a share, and it’s still hovering at half of its normal price.

This could leave a value for investors willing to take the ride. We already know the company can maintain a value twice what it is today. The only question is how long it’ll take to reach that cruising altitude again.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.

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