Delta Air Lines (NYSE:DAL) is up about 7% in the last month, but DAL stock is still too cheap and is likely to undergo a major turnaround within the next year.
Source: Markus Mainka / Shutterstock.com
One of the reasons for this is a huge pent-up demand for travel. People will start traveling again once a vaccine is available. In effect, it is just a matter of time.
Recently a major institutional investor made this point in an interview with Bloomberg. The CIO for PIMCO (Pacific Investment Management Company) said: “… if we get an economic recovery, if this mobility data takes off, you are going to see the airlines take off, people start to travel over the next 6, 12, 18 months, and that’s the potential next wave of the rally.”
As a result, PIMCO is overweight in its $1.9 trillion credit investments in the travel sector. Moreover, despite a poor Q2 earnings report, analysts are starting to recommend DAL stock.
What Analysts Say About Delta
Citigroup analyst Stephen Trent has a “buy” on DAL stock, according to Barron’s. He says that demand resumption will be “gradual and uneven.”
But he believes the airline has solid long-term positioning. It has 19 months of liquidity, having cut cash burn to $27 million a day. And it is still leaving middle seats open until Jan. 2021, which differentiates it from other airlines.
Barron’s also quoted Sanford Bernstein analyst David Vernon as saying that demand will quickly recover to recessionary levels. He has a $41 price target for DAL stock, which is 29% above today’s price of $31.77 (Sept. 4).
However, not everyone is so sanguine about Delta and airline stocks in general. For example, CNBC quotes a Berenberg senior analyst has a “hold” recommendation on Delta Air Lines.
In addition, they quote a number of other analysts that say that the traffic with airlines has leveled off at around 70% of the prior years’ level. They feel that the traveling public needs a Covid-19 vaccine before there will be a “flip switch” with the public about traveling on airlines at higher levels.
Moreover, the Wall Street Journal recently painted a very cut-throat picture of how competition is now hurting the airlines’ strategic fees. The move by United Airlines (NASDAQ:UAL) to eliminate domestic change fees, which was immediately copied by other airlines, including Delta, will cost.
WSJ estimates it will reduce revenue by hundreds of millions of dollars. It’s also a sign that airlines are ready to take “competitive risks” sooner than analysts expected.
So in the end it gets down to a wide availability, efficacy, and acceptance of a vaccine solution before Delta Air Lines and DAL stock take off again.
Where DAL Stock Is Headed
The WSJ article quoted industry sources as saying that demand for airline travel would not reach 50% of last year’s travel until there is a vaccine. Moreover, it could take three or four years before there is a full return to 2019 levels.
Even if that is the case, I believe that DAL stock will likely turn around at a faster pace. Markets will anticipate recovery in the airline’s prospects sooner than expected.
For example, Delta stock is roughly at about half its previous 2019 peak of $62 per share. Let’s say it takes two and a half years before DAL stock reaches its previous peak (using a 12 month forward discount by the market). That implies roughly a 100% move by DAL stock over 2.5 years, or a 40% annualized rate of return.
However, on a compounded basis, the stock would actually only need to rise 31.95% annually over that period in order to double by the end of two and a half years. Nevertheless, that is still a pretty good return.
And remember that is just a baseline expectation. I highly suspect that once there is a vaccine, the markets will rotate heavily into travel stocks like Delta. That may be jumping the gun, so to speak. But this often happens these days, as investors try to outdo each other in terms of forecasting the future.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
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