6 Reasons Why Berkshire Hathaway And Buffett May Be Buying Into Boeing

Summary

• There is a rumor that Berkshire Hathaway is building a stake in Boeing.
• There are six reasons that make me take this rumor seriously.
• Potentially, this is the first sign of a Berkshire buyout.
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On the Seeking Alpha wire, I noticed a news piece about Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) building a stake in Boeing (BA). I think there is actually a fairly high likelihood this is the case for these six reasons:

1. Wide moat company in trouble

Warren Buffett likes to buy after a company with a wide moat gets itself into a scandal. The most famous example of that is when he started buying American Express (AXP) after the salad oil scandal.

2. Within the circle of competence

Buffett buys things he knows. Berkshire bought Precision Castparts in January 2016 for $32.3 billion. Precision is a supplier to Boeing and Airbus (OTCPK:EADSF) and other aircraft manufacturers and suppliers. Berkshire also owns major stakes in Delta Airlines (DAL), Southwest Airlines (LUV), United Airlines (UAL), and American Airlines Group (AAL).

At the time of Precision acquisition, Buffett was willing to pay 17.5 times projected 12-month profit. With the current EPS estimates for Boeing, it is trading at around 16x forward earnings. That leaves a little bit of room for a premium even. It would not be surprising if Buffett likes the price.

I was not surprised at all Buffett rebuffed Tiffany (TIF) because he often harps on his retail mistakes, and retail is currently extremely treacherous. There is very little chance of him wading in there, given his historical experiences. Few successes and quite a few failures.

3. Buffett wants to deploy capital (at attractive relative valuations)

Buffett said in his annual letter to shareholders

"In the years ahead, we hope to move much of our excess liquidity into businesses that Berkshire will permanently own. The immediate prospects for that, however, are not good: Prices are sky-high for businesses possessing decent long-term prospects,"

With Boeing down quite a bit from early 19 highs, this seems like a good time.

Data by YCharts

4. No structural problems

I'm not entirely sure myself but from what Buffett told Becky Quick, at the end of March 2019, I take away that Buffett does not believe the 737 problem poses a structural problem:

there's a problem with this 737 max the Boeing but they're staying up 24 hours a day. They got it worked out and that won't change the industry or anything over time

He also defends the industry as being very safe, indicating he views this as an exception to the rule:

and the airline industry has been so safe I mean unbelievable we happen to sell insurance also and the rates went down so far just because the industry is so safe

5. The board has taken action

Buffett does not like situations that require him to get hands-on. He has been cured of that interest since going into Salomon Brothers in 1987. A major headache for the next nine years. Boeing's board let go of previous CEO Muilenburg only in December. Muilenburg remaining at the top job may have prevented Berkshire from going in here. The Wells Fargo (WFC) scandal, a Berkshire holding, and how that was subsequently dealt with by Wells really annoyed them. Ultimately, Stumpf and Sloan left the company over how it was dealt with. Boeing's response was similarly lackluster, at least as per the FT:

Mr Muilenburg, an engineer, spent his entire career with Boeing but was widely criticised for a faltering and defensive response to the crashes, which killed 346 people. The board indicated that it was aware of the need to improve communication, not least with the Federal Aviation Authority, its domestic regulator.

6. Right size investment for Berkshire

Finally, Boeing is the right size for Berkshire. Boeing has an enterprise value of about $201 billion. Berkshire has a cash hoard that's likely in excess of $130 billion. Acquiring 10% of Boeing in the open market is at least making a dent in the cash hoard. Buying the company outright would likely require at least $240 billion. Berkshire can make that happen, but I'm not sure if Buffett would be up for that. He doesn't like the premium. It is definitely not a given a 20% premium even would cut it here. If Berkshire would go in with a partner like on Kraft Heinz (KHC), that would be interesting.

Conclusion

In the end, I put the odds at about 60% the rumor doesn't turn out to be true at least for 2020, a 30% chance Berkshire is out there buying right now, 7% chance Berkshire will try to take it off the market in 2020 and 3% chance it will try with a partner. I've bought a few shares on the premise that if there's any truth to the rumors we are likely to hear so within one and half a month. Possibly before Boeing's earnings end of January. That seems like a limited time window to run market risk. Owning a quality company that is currently out of favor. But with the chance of meaningful upside if something comes to fruition here. This is not a lock/best idea to me, but it does seem an attractive proposition that's worth at least to talk about.

Disclosure: I am/we are long BA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.