Warren Buffett sells $6 Billion in US airline stocks – what this means for Delta, AAL, LUV and UAL investors?

The Godfather of investing – Warren Buffett announced on Saturday that he had sold $6 Billion in US airline stocks. The news came as Buffett announced to the press that his infamous Berkshire Hathaway fund had decided to cut ties with the US airline industry. Buffett explained that after consideration he had decided buying into the US airline industry was a mistake. He went on to express how the future of the airline industry is still very uncertain. Buffett explains the four large airlines are very well managed however the industry itself faces a hard task in shifting consumers perspective in flying.

Delta Airlines NYSE:DAL

Delta Connection Embraer ERJ 175 Flugzeug

Delta airlines has been a popular topic over the past 3 months as Buffett among other investors have shown interest in the company. Fast track to now, it seems DAL is likely to slip further as international travel seems unlikely until the end of this year. DAL earnings report on 22nd of April showed the grim reality of the entire industry. DAL recorded an EPS of -0.51, in comparison to an estimated -0.12. The stock is currently trading less than 50% it’s value at the beginning of this year. Now the good news is that DAL is likely to survive financially through this year as management is successfully cutting costs and raising enough capital to remain afloat. The real issue is the long term debt the company must payback over time. This will result in a sluggish growth in net profit. As well as likely postponing the idea of dividends until the company pays the subdued debt. However DAL will not be alone, as the big four airlines alongside the cruise industry will be in the same debt boat.

American Airlines NASDAQ:AAL

American Airlines headquartered in Texas, is currently trading 1/3 of it’s value PRE-COVID. The airline saw the worst performing balance sheet of the big US airlines. No demand for travel is squeezing the company of it’s liquidity. Evercore ISI analyst Duane Pfennigwerth went as far as putting a new target price of $1 on the company as investors fear the company may never recover. The company has over $34 billion in debt, causing great concern over the future of the company. The company recently posted a first-quarter net loss of $2.2 billion. 

Never before has our airline, or our industry, faced such a significant challenge,” said American Airlines Chairman and CEO Doug Parker.

The future of American Airlines looks grim however with the right management and a fast recovery- AAL will be at unbelievable value. It seems this may be the biggest risk for reward case in the US airline industry.

United Airlines Holdings NASDAQ:UAL

The United Airlines are currently trading at roughly 1/3 of it’s value PRE-COVID. UAL reported losing $1.7 Billion in the first quarter. UAL was trading above $90 a share at the beginning of 2020, a huge blow for long term shareholders. The company estimates a cash burn of $40-$45 million per day. This illustrates the extreme impact of putting a pause on international travel.

“While we are still in the midst of this crisis, we will not hesitate to make difficult decisions we believe will ensure the long term success of our company,” Chief Executive Oscar Munoz.

Southwest Airlines  NYSE:LUV

With a current market cap of $16.9 Billion, Southwest Airlines had undeniably the best balance sheet leading into COVID-19. The company has the lowest debt-capital ratio giving investors confidence in a faster recovery. With clever management, LUV has been able to cut costs efficiently and manage the crisis effectively. Although in a strong position, the next few months will be a incredible test for Southwest Airlines management. The company looks promising in it’s ability in handling this crisis, however only time will tell whether they can “walk the walk”.

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Warren Buffett’s firm sells nearly 13 million shares in Delta Airlines

In these unprecedented times, we are beginning to see a trend forming amongst investors in the international markets. Investor confidence is beginning to decay as Unemployment rates spike and companies begin to double down on liquidity solutions and slimming cost. Warren Buffett’s Berkshire Hathaway had reportedly sold $314 million USD of Delta Airways (NYSE: DAL) stock between the 1st and 2nd of April. The firm still owns a 10% stake in Delta Airlines, currently holding 58,900,759 shares in equity. The US airline is currently trading at half it’s value at the beginning of the year. The stock did rebound off the back of March in hopes of a recovery. However, recent news that the company is expecting a 90% revenue decrease in Q2 results sent the stock price downhill. In a recent statement by Delta Airways, the company is still burning through a whopping $60 million in cash a day!

A sign of Berkshire Hathaway Real Estate business in Vail, Colorado, USA

What does this mean for investors?

Now unless you are an eccentric millionaire/billionaire, I doubt you are looking to find a good entry price into Berkshire Hathaway (NYSE: BRK.A). However, Delta Airline investors may be in two minds after seeing the quick fire sale of $314 million. The recent news and poor Q2 outlooks were expected. This is one of the Big 4 US airlines that really is too big to fail. The Q2 forecasts do look concerning however according to CNBC Delta Airlines submitted an application to the Treasury Department for a government grant of $25 Billion. The grant will be on the grounds that the airline wants to refrain from cutting more jobs until the 30th of September. The stock price is likely to bounce around $20 or lower until Delta can produce some positive news on operations or an improvement on short term liquidity.

“Delta and our 90,000 employees want to thank Congress and the Administration for their bipartisan support as we navigate through the COVID-19 (coronavirus) crisis,” said Delta CEO Ed Bastian. “The aid provided in this government assistance package will go to directly support airline workers who will in turn help reignite the U.S. economy. We are committed to serving our people, our customers and our communities through this difficult period, and look forward to leading the recovery when we are past the crisis.” Ed Bastian Delta News 

Is this the opportune time to buy?

Before I start, I am obliged to remind our viewers that this is not advice only general commentary from my extensive research in this area. Now the last time Delta was trading at $20 or less was in July 2013. Most investors know Delta is at a good price. However the biggest risk is what lies ahead within the next 6 months. COVID-19 remains the big risk factor. If the virus lasts longer than expected, Delta Airlines could be looking at another big fall in stock price. In my opinion, at $22.48 the airline does hold some potential for long term cap gain. However, it would be naive to make short term evaluation of the company with such large unknowns at large. At Delta’s current price, I am currently looking for an entry below $16.40 (opinion from research). I can’t see the stock rebounding until we see “the light at the end of the tunnel” in regards to containment and improved investor confidence.

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The information above should not be taken as financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.

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