Shares of Delta Air Lines NYSE: DAL are up nearly 4% in mid-morning trading. This means that the stock has recovered all the losses it sustained after reporting what was broadly seen as a solid earnings report.
One reason why Delta’s report received a muted reaction was that the headline number (I.e. the company posting a profit) was due to the payroll aid the airline received from the federal government. When those funds were stripped away, the company was still operating at a loss, a fact the airline does not dispute.
However, things change fast in the market these days. And so it is that DAL stock is moving higher based on an upgrade from Raymond James. The firm moved Delta up two levels from Market Perform to Strong Buy and gave the stock a $58 price target. That puts it at roughly where it closed 2019.
The significance of that price target would seem obvious. According to Delta CEO Ed Bastian, the company is projecting revenue to be approximately 30% to 35% below 2019 levels by the end of this year.
The Picture is Getting Clearer
For much of the last 15 months, anyone that was trying to analyze the airline industry was doing so without data. We were all assuming and, in some cases, just assuming things had to get better. In mid-April, I made a bullish call on DAL stock. At the time, the number of vaccinations was rising and Covid-19 cases were falling.
But the stock has actually dropped a bit since I made that call. Some of that is because vaccinations are rapidly plateauing in the United States. And this is happening as the Delta variant of the novel coronavirus is causing positive cases to rise in some areas.
However, as Delta’s earnings report shows us, the recovery is happening. According to Delta CEO Ed Bastian, consumer travel is back to pre-pandemic levels. And forward bookings show that Americans are planning to travel. But as anyone that follows the airline industry knows, the real story will be whether business travel returns.
When asked, Bastain was optimistic about the return of business travel. According to the company’s internal research, it’s possible that 75% of business travel may be back within a couple of years.
What Could Cause Turbulence?
If I have any caution about DAL stock it’s simply a concern about the stock going too high, too fast. I think the stock is correctly valued today based on current revenue. And I also believe that the 12-month price target from Raymond James is also likely to be accurate.
But that assumes that everything goes perfectly. As Delta CEO Ed Bastain acknowledged on the earnings call, the company is still losing money. That should change. However, the company is prioritizing shoring up its balance sheet. Down the road they will likely reinstate its dividend which it suspended in 2020. And based on the analysts' questions on the conference call, there will be some pressure to increase wages.
Which leads to another point. By Bastian’s own admission, the company is not fully staffed yet. And although he expects that it will be in the next few months, that assumes that everything goes perfectly.
Candor Leads to Credibility
Throughout the pandemic, I gave Delta management high marks for candor. And I’m not alone in that assessment. That’s why it’s easier for me to take Bastian’s word for it when he says he doesn’t believe the Delta variant will significantly impact operations. And despite the obstacles that Delta needs to work through, travel hesitancy – or outright restrictions – are the only thing that will prevent traffic numbers from rising.
That credibility confirms my bullish outlook. DAL Stock has been lagging the broader market. But if you’re a long-term investor, snapping up shares at their current price will look like a bargain in another year.
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