Will Delta Stock Bounce Back? 

The threat of the coronavirus crisis appears to be receding now, but that will be little consolation to those companies who took the brunt of the economic hit that went before. And of those industries that really suffered from the crisis, few could have been more adversely affected than the airlines sector.

National and international travel bans, stay at home orders, and a decrease in industrial transportation all combined to drive down revenues for companies directly, and indirectly, associated with air travel.

One company dealing with the fallout of the COVID-19 pandemic is the Atlanta-based major airline carrier Delta Air Lines, Inc. (DAL). Delta’s shares dropped precipitously at the beginning of the virus outbreak, losing two-thirds of its share value over the span of a couple of months in early 2020. But with a recovery in the travel market on the horizon, does Delta’s now depressed valuation offer a buying opportunity for potential investors?

Delta’s Current Financial Position

The firm’s latest earnings report had less to do with specific numbers and more to do with where the wider financial trends were taking the company.

For instance, Delta’s free cash flow per share during the full year of 2020 came in at a loss of $8.95, whereas in 2019 it was in profit to the tune of $5.34. Getting its cash flow normalized again in 2021 would provide a major boost for the business, and Delta management now believes that its revenues and cash flow figures are close to inflection.

Indeed, during March the company posted positive daily cash generation, and predicts that for the June quarter it will be net positive, with profitability returning later in the second half of 2021, starting with a whole month pre-tax profit occurring as soon as June.

Delta is also predicting a 20% reduction in its pre-tax losses for the next quarter, with estimates of around $1.5 billion now being forecast to be at most $1.2 billion. This is made particularly more significant given that Delta still expects its revenues to be down 50% over the period. If the company can generate pre-tax profits on just 50% of its usual, pre-pandemic revenue figures, it must be doing something right.

For the sake of completeness, it’s worth noting here that Delta missed its EPS expectation this quarter by $0.38 on a loss per share of $3.55. However, the company did beat the Street’s revenue predictions by $243.22 million, posting a total of $4.15 billion, which was down 51.7% year-over-year.

Source: Unsplash

Are The Tailwinds Enough?

It’s crucial for Delta’s fortunes that the world moves as far out of COVID crisis mode as quickly as possible. On this front things appear to going well: around 20% of the world’s total population have had one COVID-19 jab, with many of the countries that Delta primarily serves having had close to 45%.

This should mean that the major travel hubs that Delta works out of should soon be open, normalizing its business operations and returning revenues back to baseline.

Furthermore, Delta could attribute much of its lost revenues recently to its inability to sell middle seat tickets for the majority its flights. However, this safety requirement has come to an end, with the company announcing that it lifted prohibitions in May and is now selling whole planes tickets to customers. 

Delta Debt Burden Is A Serious Headwind

A big problem facing Delta over the coming years will be the question of how it reduces its large debt load.

The company’s long-term debt to total asset ratio in 2019 was a very enviable 0.22, but this has since risen almost double to 0.43. Delta had to take on sizeable debt obligations throughout the pandemic to maintain liquidity, amounting to around $26 billion.

In a normal market Delta can be expected to generate about $3 billion of free cash flow, and it’s obvious that a good portion of its yearly cash is now going to be spent on bringing down that debt – probably to the detriment of financing other investments and expansion projects, as well as not increasing dividend payouts.

The company stated it has already started paying off some of its debt after its finances stabilized, notably $5.6 billion of some future debt maturities.

Is Delta Stock A Buy?

Since Delta’s large share price fall in the spring of 2020, the company’s stock has risen quite significantly to its present value of $43.26. However, this is still at a discount of 17% to its April highs early this year, and it’s tempting to think that the company, despite its past woes and debt position, could make for an attractive buy right now.

By looking at a few key metrics, it does appear that Delta could actually be reasonably priced at the moment. Its Price/Sales ratio currently stands at a pretty low multiple of 1.00 – which, compared to the sector median of 1.60, is cheaper by 38% to that of its rival’s. The firm’s Return on Equity Forward Growth Rate is at a staggering 47.30%, where the industry median is just 0.83%.

However, DAL’s forward revenue growth is still in the negative single figures at -6.01%; but, with a trailing twelve month revenue growth of -71.96%, this could be viewed in a positive light – and with the strong cash flow position expected to come later this year, this could even be overlooked for the time being.

Investors should probably know that Fitch Ratings rates Delta as having a credit risk of BB+, and that its Ratings Outlook is still negative for the business. But ratings agencies are not always right – and if Delta’s positivity outmaneuvers the analyst’s pessimism, the returns could be stellar. For those looking for a contrarian play in a beleaguered industry, Delta might just be the call.

---

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.