David Tepper Buying Airlines Benefiting from Low Fuel Prices

Tepper liked some airlines more than others

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Nov 25, 2015
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David Tepper (Trades, Portfolio) is known for making correct calls on the market and for producing stellar returns through his hedge fund, Appaloosa Management. Recently, he told CNBC he was “not as bullish” as he could be on stocks and advised investors to move more to cash. The statement marked a change from 2013, when he said he felt “definitely bullish” due to a stable private sector and a favorable combination of growth and Fed easing policy.

In that context, Tepper moved some of his portfolio out of consumer cyclical stocks and expanded his holdings of industrial stocks such as airlines to 26% of holdings from 16.9% last quarter.

Tepper held four airline stocks at quarter-end and favored some more than others.

Delta Air Lines Inc. (DAL, Financial) moved up from 10th to third place in Tepper’s portfolio, after he increased his position by 42.3% in the third quarter, buying 1,807,522 shares. His total holding of 6,077,033 composed 9.5% of his portfolio.

Tepper has held his current position in Delta since the first quarter of 2012, when the share price averaged $10. In the past quarter, its price averaged $50.

Delta, an airline hosting more than 170 million customers per year, has benefited from low fuel prices this year. It recorded a 1% increase in revenue to $10.7 billion with an 85% boost to profit at $1.49 billion. The company expected the number to rise in the future, with another record quarter of more than 30% EPS growth and 19-21% operating margins. Delta returned $1 billion in dividends and share repurchases in the second quarter. On Wednesday is dividend yield reached a three-year high.

Delta’s P/E ratio is 13.35, its P/B ratio is 3.36 and its P/S ratio has fallen to near a 10-year high at 0.97.

Tepper started a smaller new position in Southwest Airlines Co. (LUV, Financial) during the third quarter, with 1,636,300 shares representing 2.17% of his portfolio. Shares of the company have traded up 24% from their average quarterly share price of $37 to $45.82 on Wednesday afternoon.

Southwest Airlines carries about 100 million customers annually. Lower fuel prices also drove record profitability of $623 million excluding special items in the third quarter and a 20.3% operating margin. Fuel costs for Southwest were $2.2 per gallon compared to $2.94 per gallon a year ago. For the third quarter it expects even lower fuel costs, at an estimated $2.05 to $2.10 per gallon.

Operating revenues also reached a record $5.3 billion, up 10.8% from the same quarter last year. Southwest paid shareholders $549 million in dividends and share repurchases in the third quarter and has a remaining $1.5 billion of its share repurchase program.

On the sell side, Tepper vacated 68.9% of his position in United Continental Holdings Inc. (UAL, Financial), reducing 1,045,633 shares. His remaining 471,243 shares reflected 0.87% of his portfolio. His United Continental holding, started in 2010, has gradually shrunk over the past five quarters. The stock traded Wednesday at $56.31 per share, almost exactly the price it averaged for the third quarter.

United Continental revenue declined 2.4% in the third quarter to $10.3 billion, with net income of $4.8 billion, a 421% increase that included a tax-related benefit of $3.22 billion. Excluding the tax benefit, it earned $1.7 billion. United also saved $1.19 billion from lower fuel costs. Operating margins for the quarter grew to 18.4% from 11.27% the same quarter last year.

United Continental has a P/E ratio of 3.27, P/B of 2.46 and P/S of 0.56.

Last, Tepper continued to hold JetBlue Airways Corp. (JBLU, Financial), with a position he reduced by 9.2% in the third quarter, selling 453,244 shares. The stake, started in first quarter 2015, totaled 4,949,750 at quarter end. Its share price reached $25.09 on Friday, compared to $17 on average when he started the position.

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