Delta Air Lines, Inc. now dependent on bailouts
There are steep divisions between companies that are more exposed to the impact of the novel coronavirus and those that are not. Sales growth at Delta Air Lines, Inc. (DAL, Financial) has declined by 43% and profit margins are negative. The ability of companies to sustain solvency is critical to survival (or the urgency of a bailout).
Cash from operating activities (ROI) fell steeply at Delta Air Lines and only remains positive due to the recognition of the bailout proceeds from the U.S. Treasury under the Cares Act. Nevertheless, free cash flow margin took a big hit last quarter and has been 75% correlated with the share price.
Federal Reserve support
The extraordinary measures taken by the Federal Reserve to support the corporate bond market are reflected at Delta Air Lines where, despite negative cash flow and a ratings downgrade, the company raised over $9 billion from the sale of bonds during the second quarter. This is one of the biggest single quarter issuances of bonds in the company record, but without a sharp rebound in air travel, this only delays the cash flow crisis faced by the company.
Why Fastenal Company is a buy
Meanwhile, Fastenal Company (FAST, Financial) has a wide nuts-and-bolts (literally) product range that includes PPE and sanitary products. The increase in sales from safety products used by government and other healthcare professionals offset the drop in sales from industrial and construction products, producing sales growth of 6.5% from the prior quarter.
The company is recording a falling gross profit margin, but SG&A expenses are low in the record of the company and falling. SG&A expenses are being reduced at a more rapid rate than the gross margin, producing a rising Ebitda and Free Cash Flow margin.
The shares are trading at the upper end of the volatility range in a 35-month rising relative share price trend. The current indicated annual dividend produces a yield of 2.6%. Thus, despite the recently extended share price, we think the broad improvement in fundamentals makes the company a good stock to own.
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