United Airlines: Trump Was Right and Buffett Was Wrong

Back on June 5, President Donald Trump said Wall Street legend Warren Buffett made a “mistake” by selling United Airlines (NYSE:UAL) and other airline stocks. Buffett dumped his UAL stock and all his other airline names some time in the first quarter.

united airlines plane

Source: travelview / Shutterstock.com

Regardless of what you think about Trump, he has been right about airline stocks. Since the end of Q1, United’s shares are up about 30%. Heading into 2021, there are two extremely promising coronavirus vaccines on the way. United appears on track to be one of those long-term recovery plays that Buffett has been known for throughout the years. But this time, he was selling when he should have been buying.

United Airlines Stock and Buffett’s Philosophy

I was very puzzled when Buffett sold airline stocks in early 2020. Buffett is well-known for his famous quote that investors should be “fearful when others are greedy” and “greedy only when others are fearful.”

However, I have always liked another Buffett quote that is stated slightly differently.

“The best thing that happens to us is when a great company gets into temporary trouble … We want to buy them when they’re on the operating table,” Buffett once said.

In theory, airline stocks fit this description perfectly. United reported earnings per share of $12.04 in 2019, up 35.3% year-over-year. Its revenue was up 4.7% YOY, and the stock was trading at an appealing earnings multiple of around 7.3. United was a market leader in a critical industry and a value stock delivering impressive earnings growth.

Obviously, the pandemic completely crushed the global travel industry, but that was not United’s fault. To me, United seems like an obvious example of a great company that got into “temporary trouble.”

Why Buffett Sold the Stock

At the time Buffett sold airline stocks, there were no vaccine candidates for the coronavirus. There were definitely not any candidates with potentially greater than 90% efficacy rates like the vaccines from Pfizer (NYSE:PFE) and Moderna (NASDAQ:MRNA) appear to have.

At the time Buffett sold his shares, scientists didn’t really understand COVID-19 very well either. The mortality rate of the virus ended up being much lower than feared. It has continued to drop throughout the year as doctors have learned the best way to treat patients.

There are two primary reasons that UAL stock has climbed 30% since the end of March. First, the U.S. government has stepped in with unprecedented economic stimulus.

As a result, United and other airlines have gotten $25 billion from Washington with essentially no financial strings attached. Airlines are also expecting to get another round of dedicated bailouts in the next stimulus package.

At the time Buffett sold his airline stocks, he had no idea the government would provide virtually unlimited funding to get them through the crisis.

The other thing Buffett didn’t know was how effective a potential vaccine would be. The typical flu vaccine is around 40% effective.  Moderna’s vaccine candidate is reportedly 94% effective and could potentially be widely available by mid-2021.

Is UAL Stock Still a Buy?

Hindsight does very little for investors other than educate them on how to trade in the future. The trick when it comes to airline stocks is determining whether they’re likely to rise further in 2021 and beyond.

I bought UAL stock for myself back in late March, and I’m still on board for the long-haul.

In the near-term, United’s finances will be fine, thanks to the government. It will presumably be totally safe to fly sometime in the next year, thanks to the vaccines. To me, the only major question for  investors is if and when airlines’ business will return to pre-pandemic levels.

Bank of America expects United to report  2022 EPS of $5.70. That  is less than 50% of the company’s 2019 EPS. However, United’s  shares are currently only trading at an earnings multiple of around seven times that number, which is extremely cheap.

Bank of America also forecast United’s earnings before interest, taxes, depreciation, amortization and restructuring or rent costs (EBITDAR).

The firm estimates that United’s shares will advance 20% above its current levels even if its EBITDAR only recovers to 75% of its pre-pandemic levels in the long-term. In other words, the stock should trade higher even if the company has permanently lost about 25% of its business. For the record, I doubt that the latter scenario will play out.

How To Play United’s Stock

Buffet spooked airline investors by selling his shares earlier this year. My best guess as to why he did it is that the risk posed by the shares was simply too extreme at the time. Now that vaccines and bailouts have mitigated much of that risk, I believe United and the other major airline stocks are great examples of Buffett stocks to buy while there’s still a little bit of blood in the streets.

On the date of publication, Wayne Duggan held a long position in UAL.

Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. He is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market.

Article printed from InvestorPlace Media, https://investorplace.com/2020/11/united-airlines-trump-was-right-and-buffett-was-wrong/.

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