When Delta Airlines was trading below $20 a share, billionaire Warren Buffett dismissed airlines as a place where his conglomerate Berkshire Hathaway would invest, stating at a May 2013 annual shareholder meeting the sector has “been a death trap for investors.”
Now, with Delta trading at far higher prices, Berkshire Hathaway is buying the stock and its peers, American Airlines, United Continental Holdings and Southwest Airlines.
On Monday evening, Berkshire Hathaway released a quarterly 13-F filing with the Securities and Exchange Commission, which showed it built new stakes in three airlines during the third quarter. Berkshire now owns 21.8 million shares in American Airlines, worth nearly $1 billion at current prices, in addition to stakes in Delta and United Continental of around $300 million apiece. CNBC separately reported Berkshire purchased shares in Southwest Airlines.
WASHINGTON, DC – JUNE 14: Warren Buffet participates in a discussion during the White House Summit. (Photo by Alex Wong/Getty Images)
The buying marks a reversal of opinion for Berkshire Hathaway, which earlier in 2016 closed a $32 billion takeover of Precision Castparts, one of industry’s biggest parts suppliers. Three and a half years ago, Buffett was pressed by value investor Bill Miller on whether Berkshire would consider buying airlines due to the industry’s consolidation and rising pricing power. Buffett responded by stating “investors have poured their money into airlines and airline manufacturers for 100 years with terrible results,” citing the losses Berkshire took on a 1989 bet on the preferred stock of U.S. Air, a predecessor to American.
Now, with Precision Castparts inside the coffers of Berkshire Hathaway to go with over $1 billion in airline stock bets, it seems Buffett’s calculus may be changing. It also indicates Buffett and the firm’s up and coming portfolio managers Ted Weschler and Todd Combs spot value in the industry’s single digit price-to-earnings multiples.
American, Delta and United Continental currently trade at a multiple of less than 9-times their forecast 2017 profits, and enterprise values of less than 5-times forecast earnings before interest, taxes, depreciation and amortization, according to FactSet. Southwest Airlines trades at a more expensive P/E of 12.4x, closer in line with industry upstarts like JetBlue and Alaska Airlines.
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When compared with a market multiple approaching 20-times profits and an economy showing signs of life, perhaps airlines aren’t the deathtrap Buffett once made them out to be. That being said, airlines traded off sharply during the summer as industry-wide capacity began to increase and some pricing power abated. The selloff gave Berkshire a nice opportunity to enter the sector, but it could also indicate investor concern after years of sharply rising profits.
There is a chance it is Buffett’s lieutenants Combs and Weschler who are spotting the value in airlines and caused a change of opinion inside Berkshire’s Omaha, Nebraska headquarters. After all, it was Combs who brought Precision Castparts to Buffett’s attention. Meanwhile, many of Berkshire recent stock bets such as Charter Communications, Liberty Media and Twenty-First Century Fox have come from either Combs or Weschler.
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