Airline stocks have been flying high recently, as investors applaud liquidity injections and bank on air travel and the economy bouncing back with the resurgence of normality.
Delta Air Lines’ (DAL) shares have rallied, too. The airline is up by 44% in the last month. Yet, even after the surge, shares are still down by 46% year-to-date.
It is also worth noting that the rally hit turbulence on June 9 (Delta stock lost 7.5%) following a statement from the International Air Transport Association’s CEO, who said, “financially, 2020 will go down as the worst year in the history of aviation.”
The news is hardly surprising following the onset of the COVID-19 pandemic, which has seen air travel demand drop by more than 90%, with revenue evaporating into thin air.
However, Deutsche Bank analyst Michael Linenberg thinks Delta has the required cash to see it through the cloudy macro environment.
“Delta is expected to end the June Q with approximately $14 billion in liquidity, which is likely to be among the highest of any carrier we follow (Delta will be vying for the top spot with Southwest), with the option of further enhancing its cash position by $4.6 billion via the CARES Act Loan Program (the company has until September 30, 2020 to decide whether to tap this additional source of liquidity),” the 5-star analyst said.
The company also expects to have “break-even cash flow by year end,” although that depends on demand and it achieving its cost targets.
Cost reduction will be vital to Delta’s long-term outlook, Linenberg argues, estimating the airline is targeting a 20% reduction in size by summer 2021.
The fact that Delta appears on track to reduce operating costs for the June 2020 quarter by more than 50% is a “remarkable feat,” yet also “reinforces the company’s built-in flexibility and higher proportion of variable costs than most of its competitors.”
Based on all of the above, Linenberg remains firmly in Delta’s corner and keeps a Buy rating on the stock. The 5-star analyst has a $47 price target, implying upside potential of 73%. (To watch Linenberg’s track record, click here)
The rest of the Street is also bullish when considering the airline’s prospects. 9 Buys and 3 Holds add up to a Strong Buy consensus rating. With an average price target of $36.36, the analysts forecast upside potential of 34% over the next 12 months. (See Delta price targets and analyst ratings on TipRanks)
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