With cases surging across the nation, a travel rebound is no longer in the cards and Delta Airlines (NYSE:DAL) is feeling the heat. The airline, like many of its peers, was ravaged by the pandemic. Flights grounded for months on end, layoffs and furloughs became a common occurrence. Analysts believe the effects of the pandemic will continue to impact Delta Air Lines stock long after it ends.
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But with that said, a low stock price also presents an opportunity to buy-in while prices are low. Delta sees a dark tunnel ahead but its fundamentals show that the airline is in fact the best among the worst. Despite sustaining a heavy loss this quarter, analysts continue to put their support behind Delta. Here’s why I believe Delta Air Lines stock is still worth your time even in a weak travel industry.
Delta Air Lines Stock Q3 Earnings: A Closer Look
At face value, Delta’s earnings report this past quarter was quite dim. The company reported a loss of $5.4 billion which was a far cry from last year’s profit of $1.5 billion. This included a decline in passenger travel of a whopping 83% — a hard hit but understandable. Earnings per share (EPS) came at a loss of $3.30 which was lower than the estimated $3.10 loss.
While this presents a gloomy outlook, there are a couple of positives to consider. For one, analysts estimated passenger revenue to drop by $2.3 billion but the actual decline was just $1.9 billion. This is by no means a win but a better-than-expected outcome at the very least.
But Delta’s biggest saving grace (and the reason why analysts still like this stock) is its liquidity position. The airline’s current cash on hand is an impressive $21.6 billion. Moreover, the daily cash burn rate averaged out to $24 million a day for the quarter and $18 million in September. This value isn’t great but it is substantially lower than the $27 million per day cash burn in June. Given that airlines will be grounded for the foreseeable future, the burn rate won’t go lower any time soon.
Another bright spot for the company is its cost-cutting initiatives. In terms of operating costs, Delta was able to cut a significant amount of its costs according to its CFO. However, the report was chock-full of various accounting charges that weighed on its bottom line. Delta also repaid a $3 billion term loan and a $2.6 billion credit facility in Q3. This is a testament to the fact that even if service revenue is low, Delta still has a firm grip on its finances.
Delta Air Lines stock may not look too good right now but the airline is in a decent position to weather the Covid-19 storm.
So What’s In Store For Delta?
The outlook on the travel industry as a whole is a mixed bag right now. Talks of a second stimulus package stalled in the last month — although most people are in its favor. This has created a lot of speculation amongst traders. On the flip side, some investors are hoping for a smoother outcome with rapid coronavirus testing in airports. This could bring the travel industry back on track even before the pandemic ends.
But regardless of the outcome, it’s worth noting that a full recovery of major airlines like Delta is not a possibility for at least a couple of years. In its third quarter, the company’s aircrafts were only at a 41% capacity. This number will only decrease as we head into the harsh winter season. Recovery of business travel could take even longer.
Taking a bird’s eye view of Delta only shows doom and gloom ahead. However, I think it would be wiser to do a deep dive into the fundamentals of this stock. Even in a volatile economy, the airline has managed to reduce its costs and pay off debts. Given the state of the sector, both figures could have been worse than before. Moreover, Delta achieved this feat with low passenger numbers and no additional government stimulus.
Looking ahead, the airline can assert greater cash control to improve its bottom line. If government aid comes through in the next couple of months, this could boost Delta Air Lines stock further. The company also stated that airline travel for the holiday season is trending positively. But don’t expect any short-term gains from this news as the overall sector is still suffering.
Staying nimble is the name of the game for most companies in the travel industry and Delta is doing a great job at making the best of a bad time. I would say that under all the Q3 earnings buzz, Delta Air Lines stock is a great buy for long-term investors.
On the date of publication, Divya Premkumar did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Divya Premkumar has a finance degree from the University of Houston, Texas. She is a financial writer and analyst who has written stories on various financial topics from investing to personal finance. Divya has been writing for InvestorPlace since 2020.