Delta: Be Cautious on the Rebound

Delta Airlines (DAL) is one of the major airlines of the United States and a legacy carrier. The company provides scheduled air transportation for passengers and cargo.

It operates through the Airline and Refinery segments. Delta Airlines, Inc. was founded in 1924 and is based in Atlanta.

In 2022, the global airline demand recovery should continue, though the Omicron variant is still the main concern that may cause a weak Q1 and Q2 for most airlines.

I am bearish on DAL stock, as there is a very high level of debt, and the financial strength is poor. Airline companies should remain risky in 2022 as their recovery is underway

Delta Airlines: The Bullish Case

Berenberg has upgraded the company to Buy from Hold with a price target of $50, up from $48, stating that “Delta offers a high-quality way to play the US recovery, with shares trading at a discount to history.”

Berenberg analysts have argued that they “expect the company to regain its margin premium versus the rest of the sector. Delta’s co-branded credit card deal with American Express will be key to this, offering resilient growth at a high margin.”

Delta returned to profitability in FY 2021 with a net income of $0.28 billion and Q4 2021 normalized EPS of $0.22 was a beat by $0.07.

Revenue of $9.47 billion was a beat by $181.13 million. This profit was the first in two years after a massive loss of $12.4 billion in 2020.

Delta Airlines Key Factors

Shares of Delta Airlines are almost flat over the past 12 months, but have gains of nearly 9% year-to-date.

Amid bad weather and staffing problems because of coronavirus infections, the firm had to cancel a significant number of flights that would otherwise have had a meaningful impact on its financial performance. Still, a stabilization in business operations may be close.

One of the key risks for Delta Airlines is the high oil prices that are harming its profitability. If oil prices remain at elevated levels throughout 2022, Delta will have a tough time keeping its fragile net margin.

Omicron variant concerns at some point should fade away. However, any new variants of the coronavirus will be very challenging for Delta Airlines, especially if countries impose new measures such as closing borders.

Delta Airlines: The Bearish Case

Delta anticipates a loss in Q1 2022 with better days in spring and mostly in summer. DAL stock earnings have made a rebound in Q3 and Q4 of 2021, but net profitability is still fragile. The debt-to-equity ratio of 9.53 is too high. The debt-to-eBITDA ratio of 15.88 is also too high.

Delta Airlines’s revenue per share has been in decline for the last five years. The Altman’s Z-score of 0.64 is in the distress zone, implying a bankruptcy possibility in the next two years.

On the other hand, even with a poor overall financial position, Delta has been reducing its debt level. In 2021 it reduced gross debt by $6 billion. The debt is not well covered by operating cash flow now.

DAL stock is relatively expensive based on its P/E Ratio (105.7x) compared to the U.S. Airlines industry average (17.6x,) and also based on its P/B Ratio (7.7x) compared to the U.S. Airlines industry average (1.8x).

Wall Street’s Take

Turning to Wall Street Delta Airlines has a Strong Buy consensus based on 13 Buys and four Holds. The average Delta Airlines price target of $50.75 represents 15.1% upside potential.

Conclusion

Delta Airlines returned to profitability in FY 2021. The company has a large level of debt, and the Omicron variant will continue to be a hurdle to overcome for the first quarter of 2022.

Things may get better for Delta in summer but the stock seems too rich as free cash flow and net margin have yet to show that Delta’s recovery is permanent.

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