Shares of Delta Air Lines (NYSE: DAL) rose nearly 4% by mid-morning. This means that the stock has recouped all the losses it suffered after …
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July 16, 2021
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This story originally appeared on MarketBeat
Actions of Delta Airlines (NYSE: DAL) are up nearly 4% by mid-morning. This means the stock recouped any losses it suffered after releasing what was generally considered a solid earnings report.
One of the reasons Delta’s report received a mixed reaction was that the main issue (i.e. the company posting a profit) was due to the the salary support the airline received from the federal government. When those funds were withdrawn, the company was still operating at a loss, a fact the airline does not dispute.
However, things are changing rapidly in the market these days. And this is how the stock of DAL increases according to an upgrade from Raymond James. The company upgraded Delta from two levels of Market Perform to Strong Buy and gave the stock a price target of $ 58. That puts it pretty much where it closed 2019.
The importance of this price target seems obvious. According to Delta CEO Ed Bastian, the company expects revenue of around 30% to 35% below 2019 levels by the end of the year.
The image becomes clearer
For much of the past 15 months, anyone attempting to analyze the airline industry was doing so without data. We all assumed and in some cases just assumed that things needed to get better. In mid-April, I made a bullish call on DAL stock. At the time, the number of vaccinations was increasing and cases of Covid-19 were decreasing.
But the stock has actually gone down a bit since I made this call. Part of the reason is that vaccinations are quickly leveling off in the United States. And this is happening as the Delta variant of the new coronavirus is causing an increase in positive cases in some areas.
However, as the Delta Earnings Report shows us, the recovery is underway. According to Delta CEO Ed Bastian, consumer travel has returned to pre-pandemic levels. And forward bookings show Americans are planning to travel. But as anyone who follows the airline industry knows, the real story will be whether business travel is making a comeback.
When questioned, Bastain was optimistic about the return of business trips. According to internal company research, it’s possible that 75% of business trips will be back within a few years.
What could cause turbulence?
If I have any precaution about the DAL stock, it’s just a worry that the stock is going too high, too fast. I think the stock is correctly valued today based on current income. And I also think Raymond James’ 12 month course target is also likely to be right.
But that assumes that everything is going perfectly. As Delta CEO Ed Bastain acknowledged, when calling for results, the company is always losing money. That should change. However, the company gives priority to consolidating its balance sheet. Later, they will likely reinstate his dividend which he suspended in 2020. And based on questions from analysts on the conference call, there will be some pressure to raise wages.
Which brings us to another point. By Bastian’s own admission, the business is not yet complete. And while he expects it to be in the next few months, that assumes that everything is going perfectly.
Franchise leads to credibility
Throughout the pandemic, I entrusted the management of Delta good marks for the franchise. And I am not alone in this assessment. That’s why it’s easier for me to take Bastian at his word when he says he doesn’t think the Delta variant will have a significant impact on operations. And despite the hurdles Delta must overcome, reluctance to travel – or outright restrictions – is the only thing that will keep traffic from increasing.
This credibility confirms my bullish outlook. DAL Stock lags behind the broader market. But if you’re a long-term investor, buying stocks at their current price will look like a bargain in another year.
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