Delta Air Lines (NYSE: DAL) reported earnings on July 14 and the results were dreadful. The airline reported a $5.7 billion loss in the second quarter. Not surprisingly, the stock is down 4% in early morning trading. Revenue for the quarter came in at $1.2 billion. That was a 91% decrease on a year-over-year basis.
Delta is also cutting flights in response to the uptick in confirmed cases of the novel coronavirus. Initially, Delta added 1,000 flights a day to its August schedule. The airline will now cut that forecast in half due to the slowing and/or reversing of reopening initiatives as well as quarantine rules adopted by several states.
However, as bad as the report was, the news was expected and largely priced into the stock. What investors were looking for was the company’s forward guidance. And they couldn’t have been encouraged by this comment from Ed Bastian, Delta’s chief executive officer. “Given the combined effects of the pandemic and associated financial impact on the global economy, we continue to believe that it will be more than two years before we see a sustainable recovery.”
Will a Recovery Really Take Two Years?
I’m not sure that I agree with Bastian’s assertion that investors will have to wait two years. The current measures to eliminate the middle seats and wearing masks are due to specific concerns about a particular virus.
That’s a different concern than the fears that gripped passengers in the weeks and months after 9/11. It’s fair to say the economy is not recovering as fast as many analysts had hoped. And layoffs are increasing throughout the country. But the economy is not facing a liquidity crisis. The Fed is making sure of that.
But this is not a problem that’s exclusive to Delta. No airline is a buy if you’re expecting to see growth in the next couple of quarters. And as Delta continues to slow its cash burn, it will be in a good financial position coming out of the pandemic.
Delta Continues to Burn Cash, But At a Slower Rate
Among the statistics that Delta Air Lines disclosed in its quarterly earnings report was that they continue to burn through cash at a rate of $27 million per day. And that’s the good news. No, I mean it. The company is managing to slow down its cash burn. The company announced it is burning 70% less cash per day than it was in March.
But the bad news is that the airline does not expect to see that cash burn slowing down for the rest of the year. That is despite the fact that 40,000 workers have accepted voluntary furloughs.
Could the short-term pain bring long-term gain?
Air travel has never been completely without risk. There have always been concerns about the health implications of having people in close proximity to one another for a long stretch of time. But it wasn’t just about the flight itself. At every step of the process can feel a little less than sanitary.
But that’s where the novel coronavirus may be a blessing in disguise. The virus is causing many companies to absorb infrastructure costs to allow workers to work from home. In the same way, the airlines are building safety measures at every touch point in a passenger’s journey. Once these measures are implemented, they aren’t going away.
So the company is making investments to make its passengers, at the very least, feel safe. But those investments may have a big payoff as passengers return to the skies.
Is Delta Airlines a Buy?
The company’s price-to-earnings (P/E) ratio continues to be below the sector average. The average P/E ratio for airline stock is 6.56. Delta’s current ratio is 4.90 meaning it’s trading at a discount to a sector that already seems undervalued.
But is that a good enough reason to buy DAL stock? If you take a contrarian outlook, you could look at Delta’s first quarter high of around $60 and its low of around $20.
The $60 represents maximum optimism. Happy days are here again. Yeah, that’s not happening. But the $20 price was at the start of the lockdown. It’s unlikely that the stock is going to get to that level.
So if you split the difference, you get a stock price of $40 which would be about a 50% increase from the current DAL stock price. That may seem reasonable. But the question is how long are you willing to wait for the stock to reach that level, particularly when the company’s dividend is suspended.
Delta has typically had a dividend to offer investors as a reward for riding out the natural volatility of airline stocks. Without that dividend, I don’t see any reward for owning Delta stock for the rest of this year.
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