The problem with following Warren Buffett is that you’re following him from far, far away. Take his big airline trade. Buffett revealed recently he purchased 24 million shares of United Continental Holdings Inc (NYSE:UAL), the parent of United Airlines, and that Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) now has $5 billion worth of airline stocks in its portfolio.
Buy, buy, buy, right?
Not necessarily. Buffett’s report covered his trades during the fourth quarter of 2016. It’s true that United shares rose 35% during that time. But since then, they have gone nowhere.
In other words, Buffett already has his profit. It’s possible that, considering the lag between trading and reporting, he has already sold his position, although he does tend to hold stocks for longer periods than that. He is no longer in Deere & Co. (NYSE:DE) or Kinder Morgan Inc. (NYSE:KMI).
The question is, should you buy UAL right now?
The UAL Bull Case
No industry group is as undervalued as the airlines. UAL has a price-earnings ratio of 9.66 as it opened for trade on March 13, about half that of the average stock. It’s not even the cheapest stock in the group. Delta Air Lines, Inc. (NYSE:DAL) sells at a ratio of 8.16 times earnings. But all the airlines have taken off over the past six months. Southwest Airlines Co (NYSE:LUV) is up a whopping 48% during that time. Alaska Air Group, Inc. (NYSE:ALK) is up 41% and Delta 26%.
Over the past few years, airlines have gotten very good at yield management, and at squeezing extra cash from passengers. Baggage fees, change fees, extra fees for tiny bits of extra room, the elimination of free food on domestic flights — it has all made flying a lot like riding a bus.
Domestic airlines flew at almost 85% capacity last year, the second straight time they have achieved that record. This has allowed the industry to book fat profits. UAL’s income before tax came in at more than 10% of revenue last year, only 30% of its assets are under debt, so it can afford newer planes, and cash flow is now nearly $6 billion each year.
But you may be closer to your financial destination than you think.
The UAL Bear Case
United stock may be the worst airline you can buy.
The company still relies on a traditional hub-and-spoke system, and is facing increasing competition from budget carriers like Alaska Air, whose systems move passengers point-to-point and whose planes thus don’t stay on the ground as long.
Check it out the next time you fly. The gate for your United flight might be open for two hours or more, while an Alaska or Southwest gate may change over every hour, even faster. The only time a plane is making money is when it’s in the air.
Investors know this. That’s why Alaska Air has a P/E of more than 14, as does Southwest. That doesn’t make these airlines expensive; it means they’re well-managed.
UAL flew at lower capacity, and with lower revenue per passenger mile in February. Even the CIA doesn’t want to fly United. While airlines like Delta have learned to face the budget threat, United is only just now seeing major encroachment from Alaska Air on its routes.
Delta, which is better run than United, is calling 2017 a “year of transition” and warning that the good times can’t get much better. CEO Oscar Munoz had to have a heart transplant soon after being named to his position in 2015.
The good news is he is better and has made some improvements at the airline. The bad news is that airline is UAL.
Bottom Line on UAL Stock
At the same time, the current recovery is getting very old. We’re eight years into the expansion, and recessions hit airlines harder than other companies. You buy airlines the way you do balsamic vinegar. The high-priced ones are high-priced for a reason. You’re better off with Alaska or Southwest than United.
Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in KMI.