Delta Air Lines (NYSE:DAL) is one of the hottest airline stocks around, given its size and track record for strong free cash flow. Yet even with the stock's impressive run over the last few months, shares remain down over 50% year to date. 

Let's break down Delta's fundamentals to determine if investors should buy the shares at their current discount, or if the discount is justified due to too much uncertainty.

An airplane flying over the clouds during an evening sunset.

Image Source: Getty Images.

Not as cheap

After bottoming out at $17.51 per share on May 14, Delta shares have been on the rise, gaining more than 50% in three months. Like other airlines, Delta has benefited from signs that while air traffic is still severely depressed, it is getting better. Although air traffic has improved substantially since late March and April (according to the TSA's traveler throughput statistics), traffic remains down over 70% from 2019 levels. 

Month Change
March (51.29%)
April (95.29%)
May (90.42%)
June (81.18%)
July (73.86%)
August (month-to-date) (71.58%)

Data Source: Transportation Security Administration (as of Aug. 16, 2020). Table by author.

Dire straits

The problem with Delta's stock appreciation is that the company is still in trouble. This is a classic case of a company's valuation increasing before significant material improvements are made.

Fundamentally, Delta continues to lose money -- albeit at a slower rate than in April. The company reported fairly bleak second-quarter results last month and also guided that third-quarter revenue would fall 75% to 80% from the same quarter last year. A bright spot was that Delta was able to reduce its daily cash burn rate from an abysmal $100 million a day in late March down to $27 million per day in June. This isn't better; it's just less bad than before. 

Long-term headwinds

In addition to Delta's short-term fundamental struggles, there's a longer-term existential concern for the company: business travel. Business travel constituted 50% of Delta's revenue before the pandemic, but the company says it "has not yet returned in any meaningful way." In fact, Delta's CEO doesn't believe that business travel will ever recover to last year's level.

The big elephant in the room for Delta is therefore the speed and extent of business revenue recovery. The widespread adoption and excitement surrounding videoconferencing, work productivity applications, and the simple realization that a lot of tasks don't need an in-person meeting are threatening Delta's business travel revenue. Many companies have embraced the cost advantages and work/life balance that come with remote work. It remains to be seen if that embrace is temporary or if it will last after the pandemic subsides.

Lost dividend

After declaring its 27th consecutive quarterly dividend in February, Delta proceeded to eliminate its dividend in an effort to conserve cash. Delta had been paying a $0.4025-per-share quarterly dividend, which would represent a 5.8% annual dividend yield based on its recent share price. It's unlikely that Delta will reinstate its dividend anytime soon, and this lack of income supports the argument against buying Delta now.

What an investment in Delta really means

Delta is undeniably in trouble in the short term. The company continues to lose money, and during the Q2 earnings call, CEO Ed Bastian noted, "With demand growth stalled at present, we expect July's daily cash burn to be similar to what we saw in June." The company's lack of progress from June to July raises doubts if Delta can meet its goal to reduce daily cash burn to $0 by year-end. The stock no longer pays a dividend, and the 50% portion of its revenue that comes from business travel remains in question.

To justify purchasing Delta shares at their current price, one must believe that the airline will be one of the long-term survivors in the industry, that business travel will largely come back, and that its cash burn will subside sooner rather than later. This claim hasn't changed in the past three months, but Delta's stock price has, leaving more to lose if Delta fails and less to gain if it turns around.

However, I do believe that Delta will be one of the two long-term winners in the industry. I would tread lightly into Delta only if you're content with parking that money away for years. Approach the investment with caution -- as the company still has a lot to prove -- but also with the reassurance that it is one of the best in its industry.