Why To Avoid Delta Air Lines… Even Though Its Undervalued

With new cases of the coronavirus spiking in the US and worldwide.

With the already historic unemployment levels and job losses in recent months.

With massive uncertainty in hospitals, banks, and other industries.

And with many Blue-Chip stocks looking vulnerable when they’re supposed to be among the best areas to invest your capital.

There are few safe places to invest today.  And this number grows smaller every day this crisis lasts.

The key to continue compounding your investments and build wealth is to keep investing well over time.

Most people think the number one way to do that is to invest in assets that will grow your capital.

And this is a huge part of things.

But another huge part of this is also losing as little capital as possible.

The fewer investment losses you have the more capital you keep.  And the more capital you keep the faster you can invest well to grow your wealth.

In recent articles I’ve shown you several stocks to avoid investing in.

Today, I want to show you Why To Avoid Delta Air Lines… Even Though Its Undervalued.

Delta Air lines (DAL) is one of the worlds largest airlines with access to more than 300 destinations in 50 countries.

Its based in Atlanta Georgia.  It has a $25.8 billion market cap. And you need to stay away from its stock at all costs…

Reason #1 is because its not profitable.

Delta Air Lines Is Massively Unprofitable

Over the last decade it earned an average operating income margin of 12.2% per year.

I look for anything above 10% so this is great.

But in the last 12 months as Covid stopped much travel worldwide its operating profit margin is negative 9.8%.

Another way to see how profitable a company is with its free cash flow to sales ratio (FCF/Sales). Over the last decade its again a solid 5.9% per year on average.

But in the last 12 months its negative 16.1%.  And it lost almost $4 billion in free cash flow in this time.

I call this the “Cash Machine” metric.

I look for anything above 5% on a consistent basis for the same reasons as I look for high operating profit margins above.  If a company surpasses both thresholds it makes it a great operating business that is safe and valuable.

For the last decade on average Delta Air Lines surpasses these two ultra important thresholds… But since Covid they’ve cratered.

The problem of unprofitability is compounded because Delta has an enormous amount of debt.

Delta Has A Ton Of Debt

It has $21.53 billion in cash compared to $41.44 billion in debt.

As a percentage of its balance sheet, total liabilities make up 95.8%.

Its debt is 161% higher than its $25.8 billion market cap.  Meaning it has more debt than the entire company is valued on the stock market right now.

And its debt-to-equity ratio is an enormous 12.34.

These are all well above the thresholds I look for when considering debt, cash, and balance sheet strength.

This huge debt load makes buying Delta enormously risky… Especially with the massive uncertainty with everything that’s going on today.

But what about its valuation?  Is it cheap enough to buy? 

Delta IS Cheap

With the markets at or near all-time highs you might expect Delta and its unprofitability and high debt to be selling at a low valuation due to the increased risk of both…

And it is.

As of this writing its P/E is 4.9.

Its P/CF is 6.2.

Its forward P/E is not available because analysts expect it to remain unprofitable for awhile.

And its enterprise value to operating income – EV/EBIT is 7.06.

On all three metrics at the top, I look to buy investments below 20 to consider them undervalued.

And on EV/EBIT I look to buy stocks below 8.

This means Delta is extremely undervalued and gives a large margin of safety in investing terminology.

When you invest in stocks that have a margin of safety it makes the investment safer.  And it also means you should expect to earn higher returns owning it in the coming years.

The inverse of this is also true…

When you invest in a stock without a margin of safety it makes the investment riskier.  And it also means you should expect to earn less owning it going forward.

With Delta being undervalued right now it gives you a large margin of safety.  But its still not enough to make its stock a buy.

Why?

The reason its so undervalued is because while all travel got hammered when Covid first swept the world in March 2020… Air travel got devastated.

At one point air travel in the US was down to almost 0 in March and April 2020.

And while its recovered, during the normally busy Holiday travel season air travel was still down by about half in 2020 compared to 2019.

And airline experts don’t expect air travel to be back to “normal” levels until 2023 at the earliest… And 2025 by other estimates.

The initial Covid Crash in airline travel almost halved Delta revenue from $47 billion in 2019 to $24.6 billion in the last 12 months.

And its also why it swung to massive losses and unprofitability in 2020 as well.

With air travel not expected to be normal for years still, Delta is in enormous trouble due to its massive debt load.

This is why its stock is so cheap… Because investors are worried Delta may go bankrupt.

If it can survive and get back to normal profitability, it’s a potentially great buy… But that’s a long way off.

Due to its massive unprofitability, large debts, and uncertainty on when air travel will get back to normal, avoid Delta at all costs… Even though its one of the most undervalued stocks I’ve seen in years.

Conclusion

If you’re looking for a solid, safe, stable, and enormously profitable investment to buy to Depression Proof Your Portfolio – avoid Delta and consider investing in one of the stocks I recommend below.

Click here to see some of the stocks we recommend to Depression Proof Your Portfolio.

Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.

0 Shares:
You May Also Like

1 Reason To Avoid Exxon

With new cases of the coronavirus spiking in the US and worldwide . With the already historic unemployment levels and job…

1 Reason To Avoid Tesla

With new cases of the coronavirus spiking in the US and worldwide . With the already historic unemployment levels and job…

2 Reasons To Avoid Starbucks

With new cases of the coronavirus spiking in the US and worldwide . With the already historic unemployment levels and job…