Warren Buffett Dumps The Airlines
Summary
- Oracle of Omaha says he sold all of his airline positions.
- Another leg down could come as a result.
- Investors looking for signs that travel is recovering.
Over the weekend, we received some major investing news from Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) CEO Warren Buffett. The legendary investor announced that he has sold all of his four major US airline stakes. Buffett admitted that he made a mistake, as the coronavirus situation has completely changed the game for the industry. While he's not disappointed in how the businesses have been run, the major borrowings needed to support these names are going to limit their upside in his opinion. Today, I want to take a look at these names in terms of Berkshire's former stakes and where things stand for each.
Let's look at United (UAL), American (AAL), Delta (DAL), and Southwest (LUV). Within 45 days of the end of each quarter, institutions like Berkshire Hathaway have to report their holdings in stocks like these four. Unfortunately, we don't have the end of March 2020 data in just yet, so the table below shows where things stood at the end of 2019, and how this related to the number of shares outstanding for each airline.
(Data sourced from each company's respective NASDAQ holdings page, for example Delta's page seen here, and 10-K filings, for example Southwest's 10-K seen here)
Now we did receive news in early April that Berkshire had sold some shares in both Delta and Southwest - 13 million for Delta and 2.3 million for Southwest. Based on the NASDAQ information above, Berkshire Hathaway was the largest institutional holder of Delta at the end of 2019, the second largest in United and Southwest, and the third largest in American. It will be interesting to see how some of the other large holders react to this news during Q2, but we won't see all of that share activity logged until mid July.
To give investors an idea of where these stocks stand currently, I put together the following table. Obviously, the coronavirus has caused these names to fall dramatically during this year and from their 52-week highs. However, three of the four names have seen rebounds of at least 17% from their yearly low. Southwest has held up the best overall, but is closest to its low, while if you gambled on United at or near its low, you've seen a major bounce in percentage terms (although you're still down a lot from the high).
(*Does not included dividends. Data sourced from Yahoo! Finance)
Investors understand that global travel has been hammered, and things aren't likely to improve that much in the near term. In the table below, I wanted to give an idea of how bad these four names are projected to see their revenues decline in each quarter this year. I also am showing what this means for total revenue declines this year, the revenue bounce back expected next year, and what two key valuation metrics show for these four names.
(Data sourced from each company's Seeking Alpha estimates page, for instance American's page seen here)
There are a couple of trends here. Southwest is the most expensive on both price to sales and price to earnings metrics, and as I showed above, it's also closest to its yearly low. Delta is expected to have the worst revenue performance over this two year period, largely thanks to expectations for it to have the worst second half of 2020. If you had to bet on one, United would seem like the way to go given the best two year revenue combo as well as the lowest P/E ratio.
What's my personal opinion of the airline sector currently? Well, I wouldn't touch any of these names with a ten foot pole. The revenue losses are certainly going to be dramatic, and large debt issuances are going to hurt the bottom line for years to come. If we look at things in quarterly sequential terms, the street is expecting things to get better in the second half of the year, but what if there is a new wave of coronavirus?
There comes a point at which debt issuances may not be possible anymore, which would mean the companies would have to turn to equity sales. Delta is the largest of these four with a market cap of $15.4 billion, while American is the smallest at $4.5 billion. Should these names need another few billion each, you're talking about massive dilution that would come to investors, and if we're at that point, it probably means shares have fallen even more, so the market caps could be a fraction then of what they are now.
In the end, Warren Buffett's announcement that he is getting out of the four major airlines is a major hit for this sector's confidence. Just as some of these names were starting to recover some of their massive losses, I fear we're about to see a new leg down as Berkshire has exited. It remains to be seen how long it will take for business to recover, and the longer the coronavirus situation lingers, the more interest expenses or equity dilution investors will face.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.
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Comments (152)
www.investopedia.com/...All news outlets are carrying this as if he just now sold. Could he be thinking of buying now? "But Warren Buffett wouldn't do that." Why not.
Than he started to invest, first in private airline companies for the rich, that I could understand somehow. When he started to invest in the big airlines I did not understand why because although there was big growth in passenger and goods traffic the profit margins and the competition was still a problem. No he is taking a loss because the airlines will have difficulty to recover in the future. He has ignored his own advise and shows that he is as human as all of us.
I am willing to take the risk over two years that they will not default. Southwest stock is a
different story entirely.
I would vote yes the profit on these will more than off-set future losses and the growth in new accounts for the good ones from the big ones that will come from this will be also great for them go NWIN, go AROW, OPY. All way under tangible book other than AROW!
Imagine ALL air-business in doldrums - not too difficult, it turns out.
Summary
She says "without your health you got nothing"
She says " All Things In Moderation."
She buys stocks and almost never sells them.
My mother always said health is the most important thing over and over "without your health you have nothing" she said this over and over growing up. Today at 89 she still swims walks 3 miles a day. She eats almost anything she wants like a Warren. But always drank lots of cold water my cousin was a doctor and he always said drink 8 cold glasses a day, not sure why cold, but common sense says it cleaner then and tastes better cold for sure.
He died in this eighties but was always in great health and in great shape as a surgeon you had to be.anyway, she always said do things in moderation, anything you want and you will be fine.d held for the long - termOutrunning in the woods today I saw the most people I have in 25 years, people of all ages no one running like me but at all hiking, it has been building the past month but today was crazy, so I think this virus will in the long run probably save 1,000,000lives or more, people are so out of shape in the USA it is not funny you see kids in high school walking the track for their mile run day with sandals on if that was my kid I would have a heart attack, some schools no gym now, just crazy people get out there get in shape today period, no more excuses. Get out there today, stay healthy, and stay alive.
But what really strikes me is people this weekend most driving in their cars by themselves all wearing masks today. But at the parks by me at least almost nobody has them on. So we really as a country we have lost our way.
Airlines want you to wear a mask know, as things open up, how was this not mandatory or not being done the past 45 days. Everything is done backward, sideways, everybody has a different opinion. I have never seen something that seems simple, use common sense wear masks period if you go out. Yet our leaders don't wear them in hospitals, I really not sure what all this means yet other than massive USA debt for all.
Even Warren Buffet said last night he has no idea how this will end but it probably won't be good he said. So, in fact, he sold stocks last quarter and bought none. Even his stock was much higher last quarter when he bought but he did nothing with this time, which means he likes cash more today. That is a statement itself.
But there are always good values he said, so if you stay in your lane, don't buy on margin and buy when things are 30%-50% below tangible book, and the business is doing good, you should do more than fine.
Remember what you pay is almost always the most important factor for your risk-reward and returns, but also so you don't get shaken out if you buy too high and it gets hit, usually, you get shaken out. You must stick to what you know and buy heavily when the time is right which is usually once every 5 or ten years.
Right now the values are in the Smaller bank stocks and there are plenty, even Warren owns mostly banks, even thou they are the bigger ones, if he could he would be buying the smaller ones hand over fist today. Not all but just the select few names with the strong asset quality that have around been around 150 years like, AROW under $21 and OPY under $21. OPY is 33%