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

AirAsia - Return on Retained Earnings

AirAsia
Year		DPS		EPS		Retained EPS
2002
2003		0		2.1		2.1
2004		0		4.8		4.8
2005		0		8.6		8.6
2006		0		21.1		21.1
2007		0		24.6		24.6
2008		0		-11.3		-11.3
2009		0		15.1		15.1
2010		0		15.8		15.8
2011		2.3		27.1	P	24.8
2012
Total		2.3		107.9		105.6
From	2003	to	2011
EPS increase (sen)				25.0
DPO				2%
Return on retained earnings				24%
(Figures are in sens)

Malaysia Airline System (MAS) - Return on Retained Earnings

MAS
Year		DPS		EPS		Retained EPS
2002		0		-2.9		-2.9
2003		1.9		18.9		17
2004		1.9		18.2		16.3
2005		1.9		-101		-102.9
2006		0		-17.7		-17.7
2007		0		26.1		26.1
2008		2.1		16.3		14.2
2009		0		25.2		25.2
2010		0		5.2		5.2
2011		0		-79.7	P	-79.7
2012
Total		7.8		-91.4		-99.2
From	2002	to	2011
EPS increase (sen)				-76.8
DPO				-9%
Return on retained earnings				77%
(Figures are in sens)

Buffett (1987): "If you aren't certain that you understand and can value your business far better than Mr. Market, you don't belong in the game."

We saw the master expand upon his concept of owner earnings and the only two basic jobs that he and his partner Charlie Munger engage in through his 1986 letter to his shareholders. Let us see what investment wisdom he brings to the table in his 1987 letter.

We are living in a fast changing world and every few years there comes a technology or a product that just brings about a revolution and spreads across the globe like a mania. Few examples that come to mind are the automobiles and aeroplanes in the US in the early 20th century or the recent Internet and dot-com mania. However, the fact that the companies in such revolutionary industries rake up equally impressive returns on the stock market is far from truth. While loss making abilities of the US auto companies and airliners are legendary, not less infamous either is the amount of wealth that has been destroyed in the Internet bubble at the cusp of the 21st century. No wonder this is what the master has to say on which companies end up winners in the stock market.

"Experience indicates that the best business returns are usually achieved by companies that are doing something quite similar today to what they were doing five or ten years ago. That is no argument for managerial complacency. Businesses always have opportunities to improve service, product lines, manufacturing techniques, and the like, and obviously these opportunities should be seized. But a business that constantly encounters major change also encounters many chances for major error. Furthermore, economic terrain that is forever shifting violently is ground on which it is difficult to build a fortress-like business franchise. Such a franchise is usually the key to sustained high returns."

"Berkshire's experience has been similar. Our managers have produced extraordinary results by doing rather ordinary things - but doing them exceptionally well. Our managers protect their franchises, they control costs, they search for new products and markets that build on their existing strengths and they don't get diverted. They work exceptionally hard at the details of their businesses, and it shows."

Indeed, with technology changing so fast in industries such as auto and Internet, it becomes really difficult to zero in on a company that will continue to exist ten years from now and in the process still give attractive returns. This is definitely not the case with a single product company existing in an industry, where more the things change more they remain the same.

In an era when investing in equities had been reduced to nothing more than moving in and out of companies based on their quotations, the master was a breed different from the rest. He did not let fluctuations in stock prices influence his investment decisions but rather viewed investments from the point of view of a business analyst, judging companies on the basis of their operating results and viewing stock market not as a guide but as a servant. Laid out below is what perhaps is one of the most lucid yet one of the most effective explanations of how one should view the stock market.

The master says, "Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.

Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market's quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions he will name a very low price, since he is terrified that you will unload your interest on him.

Mr. Market has another endearing characteristic - he doesn't mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behavior, the better for you.

But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice - Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you aren't certain that you understand and can value your business far better than Mr. Market, you don't belong in the game."

http://www.equitymaster.com/detail.asp?date=9/6/2007&story=4

Crowded skies squeeze Asia's budget carriers

Crowded skies squeeze Asia's budget carriers
Written by Reuters
Friday, 05 February 2010 21:01

SINGAPORE: Asian airlines, particularly budget carriers, may be taking off on a high-risk strategy -- ordering hundreds of aircraft to offer new routes and more flights, just as growth in low-cost travel is seen slowing, according to Reuters.

Over the next five years, budget carriers from Malaysia's AirAsia to Singapore's Tiger Airways will take delivery of over 500 planes, meaning a capacity increase of 15 percent a year -- double what some observers are forecasting.

The real prospect that some budget carriers, and the full-service airlines they compete with, may not survive the dogfight could, in turn, mean billions of dollars of cancelled orders for Boeing and Airbus.

Asia has become the largest market for the two big planemakers, accounting for a third of outstanding orders.

"Not all airlines will survive," said Terence Fan, assistant professor at Singapore Management University. "Mid-double-digit growth is a lot to achieve, and the aviation industry has had a lot of ups and downs."

"We're already seeing Thai Airways, for example, reduce its short-haul flights from Bangkok because of competition from low-cost carriers," Fan added.

Fan, who last year published a paper on Europe's passenger airline industry, noted around 130 airline start-ups there in the 10 years to 2006. Only about 50 survived, and that number has since fallen further.

While Ryanair and Easyjet have thrived and become major players in Europe, others such as SkyEurope, described by consultancy Skytrax as the best low-cost carrier in Eastern Europe, have gone bankrupt, Fan said.

Asian low-cost carriers have grown rapidly over the past decade and now account for 14 percent of intra-Asia travel, according to Airbus estimates.

Indonesia's Lion Air, for example, has outstanding orders and options for over 100 Boeing 737-900s, each with a list price of around $80 million. AirAsia will boost its Airbus A320 fleet to 175 planes by end-2015 from 70 now.

SLOWING GROWTH

But, while budget carriers achieved compounded growth of 38 percent between 2001-09, the overall intra-Asia market expanded at just 6 percent, Airbus figures showed.

Boeing said this week it expects new orders for commercial aircraft to fall short of deliveries, with no increase in demand until 2012.

Boeing had gross orders from airlines for 263 planes last year, but net orders of 142 planes after cancellations. Airbus had gross orders of 310 planes and net orders of 271.

Alex Glock, Asia Pacific managing director for Brazilian planemaker Embraer, said the golden years for low-cost carriers ended with the global financial crisis, when many suffered falling demand, much like the full-service airlines.

In the last two years, the number of low-cost carriers in Asia Pacific fell to 17 from 20, and the number of flights dropped to 11,956 from 12,034.

Glock sees regional demand growing at an average annual rate of 7 percent, following a spike in the next two years as traffic returns to pre-recession levels.

"Even though low-cost carriers grew more than the regional average, the growth spurt has passed," he said.

Many of Asia's budget airlines are also losing money.

In India, a host of low-cost and conventional airlines have emerged to challenge state-owned Air India and Indian Airlines and, in Macau, Viva is seeking financial assistance from the government to stay afloat.

Even so, analysts expect low-cost carriers to do better than the overall industry by opening new routes and picking up market share from second-tier flag carriers such as Indonesia's Garuda.

"This sector will continue to gain market share particularly in Asia's emerging economies. The region is dynamic, has huge populations with vast physical distances and enjoys rising incomes," said Tan Teng Boo, CEO of Malaysian-based Capital Dynamics, which manages $300 million.

But Tan said he does not own airline shares.

"The airline business, though glamorous, is very tough. The industry has loads of players and airlines don't have pricing power. It's essentially a commodity business with very high capital requirements and low margins." - Reuters

http://www.theedgemalaysia.com/business-news/159247-crowded-skies-squeeze-asias-budget-carriers.html

Airline Capital Expenditure

This is one of the many reasons for avoiding airline stocks.  It is a tough industry to be in.