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Should You Buy Delta Stock Before Travel Demand Returns?

Thomas Niel

[Editor’s Note: “Stay on the Sidelines While Delta (DAL) Stock Is Up in the Air” was originally published April 13, 2020. It is regularly updated to include the most relevant information.]

Delta (ticker: DAL) branded commercial aircraft taking off

Source: Markus Mainka / Shutterstock.com

With investors jumping back into airlines, what’s next for Delta Air Lines (NYSE:DAL)? The legacy carrier’s shares have rallied 70% off their lows set in mid-May. While the novel coronavirus continues to impact air travel, Wall Street is betting on a swift recovery in DAL stock.

However, many things remain uncertain. On one hand, air travel is slowly rebounding from its extreme lows in weeks prior. On the other hand, even if the novel coronavirus quickly fades away, it could be years until a rebound happens, as some industry leaders have predicted.

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Yet, while airline stocks remain risky, Delta may be a cautious way to bet on a V-shaped recovery for the industry.

Why? Delta is relatively stronger than legacy rivals like American Airlines (NASDAQ:AAL) and United Airlines (NASDAQ:UAL). That doesn’t guarantee they will survive today’s headwinds. Yet, being the “best of the worst” may be enough to justify a buy.

Let’s dive in, and see why it could be a shrewd move in hindsight to jump in at today’s prices.

What’s Next for DAL Stock After Covid-19?

The three major legacy airlines, American, Delta, and United, all face big trouble from the coronavirus. With the lion’s share of their routes inactive, cash is quickly flying out of the window.

Compared to the other two, is Delta stock a stronger rebound opportunity? At first glance, it’s hard to say yes. As InvestorPlace’s Mark Hake wrote Jun 1, the company continues to experience massive cash burn. The daily losses are coming down, from $50 million per day to $40 million per day. But, cash burn could continue through the end of 2020.

Yet, they may have enough capital to wait things out. According to Raymond James’ Savanthi Syth, the company has about 11 months of liquidity. And, with air travel slowly picking up, they can probably stretch that out a bit.

Previously, Stifel’s Joseph DeNardi cited Delta as being financially stronger relative to rivals like American. That may not mean much as underlying demand remains depressed. But it could indicate this stock is the best legacy carrier to bet on for an industry rebound.

However, a swift recovery remains a long shot. It may be up to five years before airlines recover from the coronavirus. Also, airline stocks could pull back again on the heels of additional bad news. Air travel may be slowly returning. But, with flights no more than 60% full, profitability will remain a challenge.

Did Buffett Call the Bottom?

Back in April, Warren Buffett sold Berkshire Hathaway’s (NYSE:BRK.A, NYSE:BRK.B) stake in DAL, along with other airline stocks like American, United, and Southwest Airlines (NYSE:LUV).

Given the big change in the operating environment for airlines, it makes perfect sense Buffett and Berkshire did a 180 on airline stocks.

Best case scenario, airlines ride out the weak air travel market, and return to prior price levels a few years out. Worst case scenario? Government intervention fails to keep airlines afloat, they require additional bailouts/capital infusions, and their share prices fall to lower levels.

In short, the thesis has changed on airline stocks. It’s no surprise Buffett cut his losses.

Yet, did the “Oracle of Omaha” call the bottom, as a Barron’s article predicted in May? It looks like it. Granted, the near-term picture for airlines remains bleak. But, with the specter of air travel bouncing back sooner than predicted, it may be too late to go short airline stocks. Legacy carriers remain a high-risk proposition. But, by going long the “least broken” of the three, investors could see additional gains in the near-term.

Buy DAL Stock, Even If Things Remain Up in the Air

Delta has a stronger balance sheet than its legacy rivals. But it’s all relative. With billions flying out the door each month due to the coronavirus, the company faces a tough road ahead. Travel demand may be slowly bouncing back. But that doesn’t mean a swift return to profitability.

Yet, bleak prospects have already been priced into this stock. Buffett may have called the bottom. Sure, investors could be getting ahead of themselves. But, Delta stock may move even higher as positive developments continue.

Thomas Niel, contributor to InvestorPlace, has written single-stock analysis for web-based publications since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.

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