Over the weekend, we received some major investing news from Berkshire Hathaway (BRK.A) (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.
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.
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.
Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.