Delta Air Lines Stock Poised For Strong Gains?

Delta Air Lines stock (NYSE: DAL) currently trades at $36 per share, more than 30% below its level in April 2021, and it seems like it has the potential for sizable gains. Delta Air Lines saw its stock trading at around $29 in late June 2022, just before the Fed started increasing rates, and is now 25% above that level. The stock has gained 30% since its low in September 2022 compared to the S&P 500, which gained about 10% during this period. The rally in the stock over recent months has been driven by a steady decline in the inflation rate in response to the Fed’s aggressive rate hike plan – although investors still have concerns about a potential recession. The notable increase in Delta Air Lines’ revenues over recent quarters has also contributed to the stock recovery.

Returning to the pre-inflation shock level means that DAL stock will have to gain more than 40% from here. We believe that this will materialize over time and estimate Delta Air Lines’ valuation to be around $50 per share, implying over 35% gains. This is because the company has seen a strong recovery in travel demand over the recent quarters, evident from its total available seat miles (ASM), which grew 18% y-o-y, and its passenger revenue per available seat mile (PRASM) rose 27% to 16.97 cents in Q1. Furthermore, the company has expanded its operating margins from 1.4% in 2021 to 4.0% now. Our Delta Air Lines Operating Income Comparison dashboard has more details. A continued expansion of top-line and operating margin means that Delta Air Lines will see strong earnings growth in the near future. In fact, we forecast adjusted earnings to rise a significant 73% y-o-y to $5.55 in 2023.

Our detailed analysis of Delta Air Lines’ upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022 and compares these trends to the stock’s performance during the 2008 recession.

2022 Inflation Shock

Timeline of Inflation Shock So Far:

• 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt the supply
• April 2021: Inflation rates cross 4% and increase rapidly
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. S&P 500 index declines more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline
• Since October 2022: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses.

In contrast, here’s how DAL stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

DAL and S&P 500 Performance During 2007-08 Crisis

DAL stock declined from $18 in September 2007 (pre-crisis peak) to around $5 in March 2009 (as the markets bottomed out), implying DAL stock lost over 70% of its pre-crisis value. It recovered post the 2008 crisis to levels of around $11 in early 2010, rising 126% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

DAL Fundamentals Over Recent Years

DAL revenues fell sharply from $47 billion in 2019 to just $17.1 billion in 2020 as the Covid-19 outbreak hit the airline industry hard. Revenues improved gradually over 2021 before reaching $51 billion in 2022, with a recovery in travel demand. Delta Air Lines’ ASM surged 1.7x between 2020 and 2022, but it’s still below the levels seen in 2019, before the pandemic.

Despite higher revenue, reported earnings decreased from $7.32 in 2019 to $2.06 in 2022 due to higher fuel and other operating costs. DAL reported a $19.49 per share loss in 2020 when the pandemic severely impacted its financials. On an adjusted basis, earnings declined to $3.20 in 2022, vs. $7.31 in 2019.

Does DAL Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?

Delta Air Line’s total debt increased from $12 billion in 2019 to $24 billion in 2022, while its total cash increased from around $3 billion to $6 billion over the same period. However, the rise in cash balance is partly due to additional debt raised, given the $4 billion negative operating cash flows in 2020. The company garnered $6 billion in cash flows from operations in 2022. Although the company has a high debt burden, it appears to be in a comfortable position to meet its near-term obligations.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiments, we believe Delta Air Lines (DAL) stock has the potential for solid gains despite the fears of a potential recession, as consumers prioritize travel spending over other areas.

While Delta Air Lines stock has potential for strong gains, check out how other Delta Air Lines Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

What if you’re looking for a high-performance portfolio with a low downside instead? Here’s a reinforced value portfolio that has beaten the market consistently while limiting losses during periods of sharp market declines.

[1] Month-to-date and year-to-date as of 6/1/2023
[2] Cumulative total returns since the end of 2016

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