Warren Buffett Adds to Delta Investment as Airlines Plunge to Value Territory

Coronavirus fears have taken their toll, providing an opportunity for investors

March 03, 2020

As fears of the new coronavirus mount, the share prices of airlines have taken a hit. Taking advantage of this dip into value territory, famous value investor Warren Buffett (Trades, Portfolio) recently disclosed that Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) has invested an additional $45.3 million in Delta Air Lines Inc. (NYSE:DAL).



According to GuruFocus Real-Time Picks, a Premium feature, Buffett bought 976,507 more shares of the airline on Feb. 27, increasing his stake by 1.38% to a total of 71,886,963 shares. The stock was trading around $46.40 at the time.

DAL 30-Year Financial Data
The intrinsic value of DAL
Peter Lynch Chart of DAL






Buffett added to the Delta position toward the end of a week-long U.S. market selloff, which was brought on by fears that the new coronavirus would slow economic growth worldwide. In a whiplash correction, the S&P 500 dropped 13.9% in one week, and the biggest stock fund in the world, the SPDR S&P 500 ETF Trust (SPY), saw over $13 billion in outflows.





The last time Delta traded at such a low price was in early January of 2019. While the stock price is around the same as what it was a year ago, the company’s earnings have increased since then, making it undervalued according to the Peter Lynch chart.



Beginning in January, the U.S. posed travel restrictions on entry from China, which mainly consisted of rerouting airline passengers to certain airports to be screened for the virus. In February, additional travel restrictions were implemented on passengers travelling to the U.S. from Italy, South Korea and Iran, which have also seen significant coronavirus outbreaks.

Aside from government-imposed travel restrictions, there has also been a general drop in demand for international flights as people seek to reduce their exposure to foreign countries and crowded spaces. On Saturday, American Airlines (NASDAQ:AAL) announced it would be suspending flights to and from Milan, Italy from some of its airports, a decision that is due purely to lack of consumer demand.

Decline in demand for luxury services such as airline flights are nothing new during a market downturn. While it’s true that in this particular case, the problem is greatly exacerbated by the fact the recession is the result of an epidemic, demand will pick back up again at some point. Once panic over the new coronavirus recedes, the profits and stock prices of airline companies will rise again.

At a price-earnings ratio of 6.48 as of March 3, Delta is trading at a three-year low point in its valuation. Even if its revenue falls over the next few quarters, the current price is still more attractive than it was a few months ago in regard to the company’s future prospects.

Year to date, Delta shares are down 18.67%, while American Airlines shares are down 33.86%, Southwest Airlines (NYSE:LUV) shares are down 13.02% and United Airlines (NASDAQ:UAL) shares are down 30.46%. However, Buffett also owns shares of all four airlines, indicating a confident long-term bet in the profitability of the industry.


Margaret Moran

https://www.gurufocus.com/news/1064213/warren-buffett-adds-to-delta-investment-as-airlines-plunge-to-value-territory