Offering more than 15,000 affiliated departures, Delta Air Lines, Inc. (DAL) is the nation’s second largest airline operator that serves nearly 200 million people every year, taking customers across its industry-leading global network to more than 300 destinations in over 50 countries. DAL provides scheduled air transportation for passengers and cargo worldwide and operates in two segments – Airline and Refinery.

DAL is one of the worst-hit travel stocks of 2020 with a decline in income over the past two quarters because of the pandemic. In the third quarter ended September 2020, Delta’s adjusted operating revenue of $2.6 billion was down 79% year-over-year as demand for air travel remained under significant pressure. Passenger revenues declined 83% as a result of 63% lower capacity. The company booked a net loss of $5.4 billion as it spent billions on buyouts and early retirement packages to cut its workforce. DAL reported a loss of $8.47 per share compared to the year-ago EPS of $2.31.

With travel restrictions amid the rising coronavirus cases, the company is struggling to stay operational. The recently released financial results and the potential downside based on several factors have made our proprietary system to rate DAL as a “Sell.”

Here is how our proprietary POWR Ratings system evaluates DAL:

Trade Grade: D

DAL is currently trading higher than its 50-day moving average of $30.58 but below its 200-day moving average of $34.50, indicating that the stock is neither in an uptrend nor in a downtrend. However, the stock’s 5.2% loss over the past month reflects a short-term bearishness.

Since the onset of the pandemic, DAL has moved aggressively to secure structural cost reductions. The company is retiring 383 of its airplanes by the end of 2025 — about 30% of its fleet — including 200 planes this year. Moreover, 18,000 workers quit voluntarily while another 40,000 took unpaid leaves of absence, indicating a lack of employee confidence.

Buy & Hold Grade: F

In terms of proximity to its 52-week high, which is a key factor that our Buy & Hold Grade takes into account, DAL is positioned unfavorably. The stock is currently trading 49.2% below its 52-week high of $62.48.

Looking at the past three years, the stock has lost nearly 36.8% due to its weak financials, and change in consumer and business behavior amid rising competition. DAL’s top-line has declined at a CAGR of 15.3% during the same period.

While DAL was able to reduce cash burn from around $100 million a day in late March to $27 million a day by June, progress on cutting cash burn is still low as the average daily cash burn for the third quarter was $24 million. Consequently, DAL has increased the size of its planned debt offering to $9 billion to improve its liquidity. However, the burn rate can only recover this year with air travel demand improving and bookings directly benefitting revenues.

Peer Grade: C

DAL is currently rated #5 out of 22 stocks in the Airlines industry. Other popular stocks in the group are Ryanair Holdings plc (RYAAY), Southwest Airlines Company (LUV), and China Eastern Airlines Corporation Ltd. (CEA). DAL is down 45.3% year-to-date. The sector has been heavily bleeding as RYAAY, LUV and CEA have also lost 1.6%, 27%, and 21.6%, respectively, over this period.

Industry Rank: D

The StockNews.com Airlines industry is ranked #104 out of the 123 industries. The airline industry has been bruised by the COVID-19 pandemic, with travel volumes down substantially compared to last year. The industry has been able to avoid bankruptcies so far thanks to $50 billion in government support provided as part of the CARES Act. However, the bill expired on September 30th and now the stakeholders are looking towards the second stimulus deal with great optimism.

Overall POWR Rating: D (Sell)

Overall, DAL is rated a “Sell” due to its declining business, lack of employee confidence, long-term bearishness, and weak price momentum, as determined by the four components of our overall POWR Rating.

Bottom Line

Challenging business climates emphasized both financial and operational strength. Cutting costs, reducing cash burn, and aligning its aircraft orders with projected demand has enabled DAL to trim near-term capital expenditures. However, the business is sitting on massive liabilities suggesting that the airline cannot reach profitability without measurable improvement in air traffic.

Analyst sentiment, which gives a good sense of a stock’s future price movement, is not favorable for DAL. The market expects revenues for the current year to decline by 64% year-over-year. The consensus EPS estimate for the ongoing year indicates a 238% fall from the year-ago value. This outlook is expected to keep DAL’s price momentum dull if the company doesn’t witness fresh bookings in the near term.

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DAL shares . Year-to-date, DAL has declined -46.04%, versus a 9.52% rise in the benchmark S&P 500 index during the same period.

About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...

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