To the market’s surprise, Buffett bought shares on four major airlines, United Continental Holdings (NYSE: UAL), American Airlines (NASDAQ: AAL), Delta Air lines (NYSE: DAL), and Southwest Airlines (NYSE: LUV), as disclosed in Q3 2016 13F filings.
The fact that Buffett purchased four major airline stocks at the same time suggests it is an industry play. First thing come to mind is the “new normal” of prolonged low oil prices which may be a good incentive for a long-term investment. That said, after oil prices have dropped to a quarter of its 2008 level, the airline stocks as a group still underperformed the S&P 500 by at least 50%.
Another fundamental argument is that the airline stocks may benefit from expected higher consumer spending from a strengthening economy. Mind you that the US economy may well be stuck at 2% annual growth rates as part of the same new normal.
Similar to Buffett’s buying Precision Castparts, the airline industry has been consolidating from “imperfect competition” to “oligopoly” structure for a long time. However, we yet to see the material improvement in airlines’ profit, growth or stock returns.
Of course, the default answer for any Buffett’s investments is to “buy the business at a discount to its intrinsic value.” Currently, AAL, DAL, UAL, and LUV have a forward PE of 10, 8.9, 10.5, and 12.2, respectively. They are also undervalued by 7%, 12%, 10%, and 6%, per the valuation service kcmvalue.com. Other than the magnitude of the discounts is not particularly impressive, the same discounts have persistently existed over decades.
All airline stocks rally on the news.