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Stocks  | May 11, 2020

It’s no secret the novel coronavirus has been bad news for Delta Air Lines (NYSE:DAL) stock. The legacy carrier’s shares have tumbled more than 60% since the pandemic first made headlines earlier this year. Yet, it’s highly tempting to take a look at battered stocks like this. Mr. Market may be reasonably discounting their uncertain prospects, but shares could still be a great contrarian play.

Many things remain uncertain. On one hand, the recent stimulus package may mean the airlines won’t be facing Chapter 11 bankruptcy anytime soon. On the other hand, even if the novel coronavirus quickly fades away, it could be years until a rebound happens, as some industry leaders have predicted.

Yes, once it’s salad days again for airlines, earnings could head back to prior levels. In turn, Delta will see its shares soar again. But how long until then? Could shares tumble further in the meantime?

A key question is whether Delta is relatively stronger than legacy rivals like American Airlines (NASDAQ:AAL) and United Airlines (NASDAQ:UAL). Compared to these two, they may be in better shape. But considering the amount of cash burn the company is facing, relative strength may not be enough to ride out the storm.

So, what’s the verdict with Delta? With a rebound years away, you may better off avoiding names like these for now.

What’s Next for Delta Stock After the Coronavirus?

The three major legacy airlines, American, Delta, and United, all face big trouble from the coronavirus. With the lion’s share of their routes inactive, cash is quickly flying out of the window.

Compared to the other two, is Delta stock a stronger rebound opportunity? At first glance, it’s hard to say yes. In March, CEO Ed Bastian reported in a letter to employees the airline was burning through “$50 million in cash each day” due to the pandemic. In other words, about $1.5 billion a month.

Yet, Stifel’s Joseph DeNardi sees Delta as financially stronger relative to legacy carriers like American. The analyst maintains his “buy” rating on the company’s shares. But this may not be enough to weather the storm.

Like its rivals, Delta secured billions in payroll support from the recent $2 trillion CARES Act stimulus bill. It’s hard to say whether this is a good or bad for the stock. Some thought a bailout would mean big time dilution. But dilution wound up being less painful than previously feared.

However, a government bailout alone won’t push Delta’s stock back to its high water mark. It could be years before air travel returns to pre-coronavirus levels. Shares could tread water, or fall to lower prices, in the next few years.

Given how risky and uncertain the airline situation has become, it’s no surprise Warren Buffett sold Berkshire Hathaway’s (NYSE:BRK.A, NYSE:BRK.B) stake in Delta.

Should You Care Buffett Cashed Out?

In the past few weeks, Berkshire Hathaway has exited their position in DAL, along with other airline stocks like American, United, and Southwest Airlines (NYSE:LUV).

Given the big change in the operating environment for airlines, it makes perfect sense Buffett and Berkshire did a 180 on airline stocks.

Best case scenario, airlines ride out the weak air travel market, and return to prior price levels a few years out. Worst case scenario? Government intervention fails to keep airlines afloat, they require additional bailouts/capital infusions, and their share prices fall to lower levels.

In short, the thesis has changed on airline stocks. It’s no surprise Buffett cut his losses.

Yet, could the “Oracle of Omaha’s” bearishness mean we’ve reached a bottom, as a Barron’s article recently discussed? Perhaps. But considering the potential for a slow recovery, it may not be worthwhile to jump into airline stocks today, on hopes they bounce back in a few years’ time.

It Remains Up in the Air for Delta

Delta may have a stronger balance sheet than its legacy rivals. But it’s all relative. With billions flying out the door each month due to the coronavirus, the company faces a tough road ahead. The recent stimulus bill could provide relief, but this alone won’t speed up an air travel rebound.

With Buffett selling his position, and the carrier’s potential outcomes far from rosy, it’s best to sell Delta stock until we see clear signs of a rebound.

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