What Warren Buffett of Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) sees in Delta Air Lines (NYSE:DAL) stock is a market leader selling at a discount.
The coronavirus from China has put a lot of great companies on the discount rack and, even at age 89, Buffett is looking ahead. He sees a stock yielding over 3.5% from dividends, with almost $2.9 billion in cash on the books.
He knows Delta can pay its long-term debt with just a normal year of Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA).
Buffett now owns 11% of Delta, 71.9 million shares worth almost $4 billion as trading opened March 5. But he’s not buying all of it.
Why not?
Airlines Are A Disaster Area
DAL stock isn’t the only airline stock in the Berkshire portfolio. There are similar stakes in Delta’s primary competitors — Southwest Airlines (NYSE:LUV), United Airlines Holdings (NASDAQ:UAL) and American Airlines (NASDAQ:AAL).
It would be more appropriate to say Buffett considers airlines to be good investments.
Based on the last five years, he’s wrong. While the average S&P 500 stock is up 85% in the last five years, even with the latest downdraft, the airlines have not kept pace. Even before the virus, these stocks were in trouble, with the notable exception of Delta.
Now, they’re a disaster area. United and American are down by one-third in 2020. Delta and Southwest are down by one-sixth. If Buffett has been “buying the dip,” he might be OK after a few quarters of normal traffic. If he bought at the highs, he needs to clip a lot of coupons to break even. (United doesn’t pay a dividend.)
A trip not taken isn’t taken later. Delta and American are cutting their Asia schedules. United cancelled its investor day. The industry could lose $113 billion in revenue this year, and some airlines are already going under.
Even Boeing (NYSE:BA) is cutting air travel over the virus.
What Buffett Sees in DAL Stock
What Buffett is betting on is that travel comes roaring back when the all-clear is sounded.
The fundamentals that sent U.S. airlines into bankruptcy a decade ago are now improved. Jet fuel prices are low. Labor peace is being maintained. New planes are more efficient. World trade will come back. Buffett likes to say that smart investors are greedy when others are fearful, and fearful when others are greedy. That’s why, when the market was at its height, Berkshire Hathaway was sitting on $128 billion in cash.
For Delta, the downdraft even offers an opportunity to retire older, less efficient planes, like the MD-88 series. The company earned $6.2 billion, $7.30 per share, in 2019. That was enough for Delta to give $1.6 billion in profit sharing to its 90,000 employees, over $17,000 per head. At the 2019 rate, Delta would make up its market cap with net income within six years.
The Bottom Line
I question Buffett’s purchase of most of the airline stocks, but I find it hard to argue with his owning Delta.
The company has loyal employees doing all they can in the face of the emergency. The airline doesn’t need a bailout.
Its foreign competitors might. Japan Airlines (OTCMKTS:JAPSY) announced a $25 billion bankruptcy filing in January and needed a government bailout to keep flying. This capped off a year where several major carriers went bust, many hurt by the Boeing 737-MAX scandal.
This should mean more profits are ahead for the U.S. carriers’ international routes. This could be especially beneficial to Delta. Patient investors may want to find a down day and grab a bargain.
Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.
