Delta Stock: More Near-Term Runway?

Delta Airlines (DAL) stock is trending higher again. Optimism of a COVID-19 full recovery is coming back. That’s after months of being held down by the virus variant that shares a name with this legacy airline. Does this mean it’s time to buy?

It depends. In the coming months, despite recent worries that the Delta variant of COVID-19 would bring the “reopening” to a halt, we could see this latest outbreak cool. Recent developments, such as the COVID-19 oral treatment from Merck (MRK) that’s started to make headlines, may mean the “old normal” will return sooner than expected.

Yet, while that bodes well for this carrier’s return to profitability, said turnaround may not happen fast enough to convince investors to bid it higher in the near-term. Reasonably priced compared to its 2022 results, the market is unlikely to price Delta stock materially higher than today’s price. That is, until it becomes clear that the company is on a smooth course to meeting its 2023 projections.

Couple this with the risk that current optimism about the pandemic’s end reverses back again during the fall and winter months, and Delta shares do not look that appealing after their recent pop. With this, I am bearish on it in the short-term. (See Delta stock charts on TipRanks)

Optimism is Growing Again for DAL

The Merck news, along with developments such as falling COVID-19 infections in the United States, have helped to counter the uncertainties that re-emerged a few months back for travel stocks.

Moreover, this isn’t the only reason why sentiment may be shifting back to positive for DAL stock. As Deutsche Bank analyst Michael Linenberg recently pointed out, after lagging behind other airline stocks, Delta may be ready to play catch up.

In his view, “new money” investors are more likely to buy Delta stock, rather than other plays. That’s mostly due to the perception that it’s one of the highest-quality names in the sector. With this, Linenberg considers it a “short-term catalyst call buy,” meaning it could see strong performance in the coming months.

However, Delta’s earnings recovery, due to a rebound in business and international travel demand, is only starting to take shape. There are still many factors that could sink this comeback, so investors might be wary until its 2022 and 2023 projections become more certain. For now, further near-term upside may be limited.

Not as Cheap as it Seems

It’s understandable why some may see DAL stock as a steal at today’s prices. That’s mostly because it’s more reasonably priced compared to its peers, American Airlines (AAL) and United Airlines (UAL). This airline stock trades for around 10.9x its expected earnings for 2022. That’s a sharp discount to the forward price-to-earnings, or P/E, ratios of American (28.1x) and United (14.1x).

Its forward P/E looks downright cheap on a relative basis. However, when compared to this stock’s historical value (high single-digits), Delta’s multiple is a bit stretched. That’s the case even when you consider its current valuation compared to analyst projections for 2023 results.

In 2023, consensus calls for earnings per share (EPS) of $6.82. If you would apply a high-single digit (8x) multiple to this figure, the result is around $53.37 per share, 17.3% in upside compared to its current trading price. This may appear to be a solid potential gain, but less so when you consider the risk that current optimism about the pandemic’s approaching end will be proven wrong.

The discount to its estimated results nearly two years out appears to be warranted. 

What Analysts are Saying About DAL Stock

According to TipRanks, DAL stock has a consensus rating of Moderate Buy. Out of 16 analyst ratings, 9 rate it a Buy, 7 analysts rate it a Hold, and 0 analysts rate it a Sell.

As for price targets, the average Delta price target is $55.85 per share, implying around 23.07% in upside from today’s prices. Analyst price targets range from a low of $45 per share, to a high of $67 per share.

Bottom Line: Ride Could be Bumpy for Delta Airlines Stock

Recent analyst commentary may make the argument that shares in Delta Airlines are ready to take off in the coming months.

However, it is important to consider the fact that its comeback appeared priced into its shares. Not only that, despite recent optimism, the pandemic continues to make the forecast for a travel recovery murky.

DAL stock may be bouncing back now. Yet with the risk that this rebound will be fleeting, this carrier could experience a bumpy ride, much like one of its main competitors.

Disclosure: At the time of publication, Thomas Niel did not have a position in any of the securities mentioned in this article.

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