Delta Offers Value for Investors With Strong Stomachs

No-moat rated Delta DAL reported a difficult third quarter as the ongoing pandemic continues to fundamentally challenge the firm’s business model. Delta performed somewhat better than expected, however, and we are modestly raising our fair value to $43 per share from $42.50 after adjusting our model for quarterly results. We see the stock as the best value in our U.S. airline coverage.

Passenger revenue declined 83% year over year on capacity declines of 63%, a load factor of 40.8%, and yield declines of nearly 2%. While these results are bleak, the firm tripled revenue passenger miles relative to the previous quarter, which we think is a clear indication of a nascent recovery in commercial aerospace. We continue to expect a far more robust recovery to begin when a COVID-19 vaccine is released and will accelerate when it is widely available, which Morningstar anticipates will occur by the end of 2020 and mid-2021, respectively. We note that Delta is staffed (at the non-pilot level) at roughly 80% of 2019 levels, which probably provides an upper bound for potential capacity in 2021. We’re anticipating that the company will provide roughly 76% of 2019 capacity in 2021, which reflects some weakness in the first half of the year, due to vaccination holdups, offset by strength in the back half when we expect vaccines are broadly available.

Excluding restructuring charges and CARES Act benefits, operating expenses were roughly half of what they were in 2019 and grew about 6% from the second quarter, despite capacity growth of over 250% from the previous quarter. The average adjusted daily cash burn declined from $43 million in the second quarter to $24 million in the third quarter primarily due to better revenue. The company ended the quarter with $21.6 billion of liquidity, which we think buys the company a little over two years from the end of the quarter for a vaccine to be developed assuming no improvement in the operating environment.

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