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Delta Air Gains From Upgrade

J.P. Morgan says the stock may have some upside. S&P replies with cautious comments.
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Delta Air Lines


shares soared Wednesday after a Wall Street analyst said the market has gotten ahead of itself in predicting the airline's bankruptcy.

J.P. Morgan's Jamie Baker upgraded the stock to buy, contending a possible bankruptcy filing by Delta remains farther out on the horizon than many investors assume.

"Delta's 2006 Chapter 11 probability remains high, though in 2005 remains comfortably below the 75% implied by the equity market," wrote Baker in a research note explaining the upgrade. "While the market's bankruptcy conclusion may ultimately prove accurate, we believe it is one winter season premature."

Baker's firm does and seeks to do business with companies covered in its research reports.

Shares were up 24 cents, or 8%, at $3.25 Wednesday afternoon after rising as high as $3.45. Volume of almost 5 million shares was well ahead of the 3.4 million-share daily average for the last three months.

Delta has been fighting hard to keep itself out of bankruptcy protection. Late last year it persuaded pilots to accept $1 billion in annual concessions. It has also overhauled flight scheduling to improve efficiency and launched a bold fare simplification program aimed at winning back customers who had flocked to discount competitors.

But the airline has acknowledged its plans didn't take into account the skyward trajectory of oil prices this year and has suggested it could face a cash crunch. Last week,

Delta offered a crystal-clear warning, saying cash flows for the rest of the year won't meet all of its liquidity needs. The ensuing selloff sent shares to their lowest levels since at least as far back as 1980.

"We do believe Delta can bridge its liquidity chasm, or at a minimum gather significant market confidence as it tries," Baker wrote. "We therefore suggest risk-tolerant investors are facing a short-term opportunity to exploit Delta's pending survival efforts, and forecasted ability to limp into Spring 2006."

The analyst cautioned that only short-term investors should heed his advice.

But others on Wall Street view Wednesday's rally as an opportunity to get out of Delta's stock before things get even worse.

"We disagree with this assessment," wrote Standard & Poor's equity analyst Jim Corridore, in reference to Baker's note. "While we think Delta has assets it can sell to raise cash, like its regional airlines Atlantic Southeast and Comair, we think it needs to protect these assets and its remaining cash in order to be able to attract new financing.

"We view today's uptick as an enhanced opportunity to sell the stock, based on our view of continued risk that shares would potentially be worthless in bankruptcy."