Investment guru Warren Buffett has loaded up on airline stocks, but savvy investors can now climb aboard the same flight to profit at a reduced rate thanks to a recently industry slump.
“The Berkshire Hathaway (BRK.A) (BRK.B) chief was a longtime airline bear, complaining in shareholder letters about “kamikaze pricing” and repenting for a past investment in US Airways stock, even though it made money for Berkshire," Barron’s reported.
"In November, however, securities filings showed that Berkshire slashed its stake in Wal-Mart Stores (WMT) and added positions in American Airlines Group (AAL), Delta Air Lines (DAL) and United Continental Holdings (UAL). Buffett later told CNBC that Berkshire has also bought shares of Southwest Airlines (LUV),” Barron’s reported.
“That’s a sign the airline industry had finally addressed structural problems that Buffett called out for years,” the report explained.
“One reason, surely, is the collapse in the number of major U.S. air carriers from seven in 2000 to four in 2015, which Barron’s detailed in a cover story (“Airline Stocks Could Soar Up to 50%”)," Barron's explained.
"The global financial crisis spurred airlines to rework their union contracts, shore up pensions, bring down operating costs and add passenger fees for everything short of sneezing. A plunge in jet fuel’s price was a boon. Most important, airlines have suppressed the urge to blow out capacity now that profits are plump. That means they are likely to avert a price war, and keep capital spending under control,” Barron’s reported.
To be sure, there are other signs that the airline industry just may be emerging from a turbulent period.
United Continental Holdings Inc., the longtime laggard of the U.S. airline industry, just passed American Airlines Group Inc. in an important yardstick: market value, Bloomberg reported.
Investors betting on United’s turnaround strategy have pushed the carrier’s market capitalization to $22.9 billion at the close Thursday, nosing ahead of American’s for the first time since the spring of 2014.
To be sure, the total value of American far exceeds United’s when accounting for debt as well stock. American’s enterprise value, as the measure is known, is about $41 billion to United’s $29 billion, according to data compiled by Bloomberg.
Meanwhile, Berkshire could get a $29 billion boost to its book value under tax-rate cuts advocated by Trump, according to Barclays Plc.
“We would view this magnitude of increase as favorable for Berkshire shares since it is generally valued on price to book value,” Barclays analysts led by Jay Gelb said in a note to investors.
The prospect of lower taxes is also helping. Gelb’s analysis covered a net deferred tax liability of about $50.4 billion at the end of 2015, a figure that includes potential costs if Buffett sells investments that gained in value, Bloomberg reported.
(Newsmax wire services contributed to this report).
© 2023 Newsmax Finance. All rights reserved.