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DAL Stock Soars on Narrowing Losses, Price Hikes
Stock Analysis & Ideas

DAL Stock Soars on Narrowing Losses, Price Hikes

Delta Air Lines (DAL) has managed to break through a lot of trouble in its time. The last two years have been a slow-motion disaster in progress for a lot of airlines out there, but Delta is showing signs of a comeback in progress.

The company reported its earnings and, despite some unsettling results, managed to gain 6% in today’s trading session, so far.

I’m holding to a neutral position on Delta. The company’s gains are impressive, especially given the conditions, but underneath it all, Delta made its headway today by losing less than expected.

Calling Delta’s last 12 months in share prices “turbulent” is almost too easy. April to August 2021 featured a steady decline, but starting in September, a series of ups and downs followed that saw the company fluctuate wildly between $30 and $45 per share.

The latest news will prove helpful, to at least some degree. Delta posted a loss of $1.23 per share. That works out to be around $940 million lost. Yet, this seeming disaster is actually a win snatched from the jaws of defeat. Analysts were expecting a loss of $1.27.

However, Delta’s revenue win is much clearer. Delta posted revenue of $9.35 billion against an expected $8.92 billion. Best of all, Delta revealed that its total unit revenue for March was actually above pre-pandemic levels for the first time.

Wall Street’s Take

Turning to Wall Street, Delta Air Lines has a Strong Buy consensus rating. That’s based on 12 Buys and three Holds assigned in the past three months. The average Delta price target of $47.79 implies 16.9% upside potential.

Analyst price targets range from a low of $38 per share to a high of $57 per share.

Several Stress Cracks in Delta’s Fuselage

While analysts think the recovery narrative is in full swing—and not without reason—there are several issues lurking under the hood at Delta.

Easily the biggest issue is the hedge fund picture. The TipRanks 13-F Tracker reveals that hedge funds have been abandoning Delta since December 2020. All four quarters of 2021 featured declining involvement with hedge funds.

In fact, given that March 31, 2020, featured over 110 million shares owned by hedge funds, it’s clear Delta has a long way to go to get back to those levels.

Moreover, insider selling spiked in the most recent quarter. Delta insiders performed 20 sell transactions to just 11 buy transactions. The result? A net loss of $803,300. There are several ways to explain this, of course, from portfolio rebalancing to tax issues.

However, given that the huge number of sell transactions were conducted in January 2022, the notion that it’s a tax issue seems less likely. It also comes ahead of a major dip in share prices that hit in mid-February.

Delta’s dividend history, meanwhile, used to be just what an income investor would want. Now, it’s a disaster. Delta Air Lines hasn’t issued a dividend since February 2020 and seems to have no plans to restart one.

That’s reasonable enough given that the company is aspiring to profitability again after two years of pandemic-induced losses. However, for a company that saw a regular and regularly raised dividend, it’s a huge step back.

Winning by Losing

The biggest problem with Delta right now is that its current performance depends greatly on your point of view. If you want to say that the recovery narrative is finally kicking in after a series of false starts, you have plenty of evidence.

Delta turned in beats on both earnings and revenue. It’s seeing pre-pandemic traffic levels again. It’s hiking prices in response to surging fuel prices. All of this is true and supports a bull case for Delta.

Yet, at the same time, a bear case also emerges. Delta posted a massive loss and won because analysts were slightly more pessimistic than reality called for.

There are recoveries taking place in business travel, too. Reports noted that domestic corporate travel is about 70% of normal, while international business travel is about 50% normal.

Delta is also passing on costs to customers, which will likely turn on the company once travelers start cutting back in the face of surging inflation and an economic downturn.

Then, add in what we know about Delta’s current position. Hedge funds have backed way off since 2020. They’re still backing off to smaller degrees. Insiders are selling. The dividend is shot. None of this looks like a recovery in progress. Delta is also selling above its lowest price targets. While there’s significant upside potential, the potential for further losses is there as well.

Concluding Views

Delta might have been able to make a case for itself as a turnaround in progress. It wouldn’t have been out of line with the sheer numbers of returning fliers. However, this turnaround comes at just the wrong time in a macroeconomic sense. Delta will be hard-pressed to keep those numbers of travelers coming in, particularly if inflation numbers keep surging.

There’s still hope that Delta can keep its recovery going. That’s why I’ve pulled back to neutral. However, the odds of Delta adding to its position in light of everything else going on are not that great. That prevents me from acknowledging the full recovery narrative and keeps me out of involvement with Delta.

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