Delta Airlines (NYSE: DAL) entered in 2020 at the top of his game, an industry leader and pioneer who led a revolution that promised to rid the United States airline industry of its boom and bust history and get airlines through the business cycle.
But neither Delta nor any other airline was ready for what lay ahead. The COVID-19 coronavirus pandemic has devastated the global economy and disrupted travel, leading the industry to come to Washington hat in hand to seek $ 50 billion in financial assistance.
Delta shares have plunged 60% year-to-date and in so doing have outperformed the shares of most other US airlines.
Trying to catch a falling knife is always dangerous, and it’s hard to predict where Delta’s shares will drop as the pandemic rages on and the planes are grounded. But for investors who have the guts to weather the turbulence, is now the right time to buy Delta shares?
A world of suffering is coming
In recent years, Delta has grown into a blue chip operator, boasting one of the highest credit ratings in the industry. And it’s the rare airline to pay a dividend. The industry has recently been criticized for waste capital on buyouts, but Delta’s capital allocation policy in recent years has been somewhat conservative: 50% of operating cash flow is reinvested in the company, 30% goes to debt reduction and 20% to shareholders .
None of this prepared the airline for the novel coronavirus. On March 20, Delta declared it currently burns 350 million dollars per week, with second quarter revenue expected to fall 80% year over year.
Image source: Delta Air Lines.
The company is immobilizing more than half of its fleet, freezing hiring, suspending its dividend and reducing the compensation of executives and directors. Delta recently entered into a new $ 2.6 billion secured credit facility and intends to draw $ 3 billion from existing revolving lines, but no balance sheet can withstand the damage from the pandemic indefinitely as revenues have stopped.
Delta has other levers to pull if it needs additional cash. The company has one of the most lucrative co-branded credit cards in the industry thanks to its close partnership with American Express and could possibly make a deal to pre-sell credit card miles in exchange for extra cash.
It’s clear that the current quarter and second quarter of 2020 will be financial disasters, and with the entire nation currently sheltered in place, the summer vacation months are also expected to be slow at best. The slowdown could last well beyond the pandemic if the novel coronavirus pushes the U.S. economy into a recession, which typically means a reduction in commercial flights.
Delta fails or gains altitude
Delta is trading today at 6 times earnings and 0.6 times sales. I cannot say for sure that the stock will not fall further in the coming weeks. But I’m convinced that, assuming the company can get through this current period without filing for bankruptcy, the stock is undervalued today and is a good buy for a long-term holder. If it keeps falling, it’s possible another valuable investor could step in and buy the shares before they get the chance.
Buying Delta shares today is like buying a option contract: Either it will make you money, or it will end up worthless. I dare not try to predict the exact conditions that will be attached to a possible government assistance program, but I believe that a program will be carried out and that it will not involve the nationalization of the airlines.
And while a bundle of help doesn’t come, Delta is one of two carriers that I think can endure a downturn longer than anyone else. The other, Southwest Airlines, trading at 10.6 times earnings and 1 times sales, is currently a significantly more expensive stock than Delta.
If you are worried about how long the pandemic will last, or if you don’t know what the government might ultimately demand in return for the aid, it might be best to commit only a small amount of capital now and to watch how the coming weeks unfold. But I absolutely believe that those who have the courage to buy Delta shares now will make money in the long run once the novel coronavirus and the economic crisis it is causing is over.
10 actions we prefer at Delta Air Lines
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Lou whiteman owns shares of Delta Air Lines and Spirit Airlines. The Motley Fool owns shares and recommends Delta Air Lines, Southwest Airlines and Spirit Airlines. The Motley Fool recommends Hawaiian Holdings and JetBlue Airways. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.