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Delta Air Lines Short

by SignalFactory   ·  October 7, 2020 | 13:51:25 UTC  

Delta Air Lines Short

by SignalFactory   ·  October 7, 2020 | 13:51:25 UTC  

Delta Air Lines (DAL) will be the first major company in its sector to report the results of yet another action-packed quarter in the airline space. As of Monday, the carrier had not announced the timing of its earnings release, which usually takes place between the 12th and the 15th day of each quarter.

Analysts expect to see revenues decline by a whopping 75% in 3Q20 after they dropped around 90% in the second quarter of 2020. However, I doubt that beating or lagging top-line consensus will matter much to investors and the stock on earnings day. More important will be the discussions around (1) cash management and (2) expectations for the eventual recovery.

What to expect in the third quarter?

Clearly, there is virtually no chance that Delta or any of its peers will be able to pull off half-decent numbers in the third quarter. Other operating metrics that usually matter to analysts and investors, including load factor (i.e., occupancy) and CASM (i.e., cost per unit), will likely be a secondary topic of conversation as well.

Front and center instead will be cash management. By the end of last quarter, Delta had been burning $27 million in cash per day. Interestingly, the figure had not gotten better by as recently as a couple of weeks ago, suggesting that Delta may have hit something close to a floor on how much it can save to partially offset top-line softness.

Lastly, an update on travel activity and the management team’s outlook for the recovery will be welcome. However, I expect any projection to be somewhat speculative and not supported by firm commitments, considering all the uncertainties associated with the ongoing COVID-19 crisis.

How to approach the Delta Air Lines stock?

Picking winners in such a battered sector is a very tough proposition. Before deciding whether to buy or not DAL, I believe investors need to first think strategically about their portfolios and how such a stock might fit into it.

There are very few (if any) convictions about the recovery in air travel. For all purposes, I have set the bar as low as possible, expecting activity (business and international, especially) to be scarred from this year’s pandemic well beyond a solution for the COVID-19 crisis has been put in place.

Because of the high levels of uncertainty, you should then look at the companies that are most likely to thrive in the next several years. In other words: if the airline sector survives 2020, which it most likely will, which carriers will probably thrive in a post-COVID-19 environment? When it comes to the Big 3 US-based legacy players, Delta is one of the top-of-mind names.

Delta Air Lines Short (Sell)

ENTER AT: 29.96

T.P_1: 28.09

T.P_2: 26.90

S.L: 32.63

Delta Air Lines
Delta Air Lines
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