1. How to use GuruFocus - Tutorials
  2. What Is in the GuruFocus Premium Membership?
  3. A DIY Guide on How to Invest Using Guru Strategies
GuruFocus
Articles 

Warren Buffett Bought Airline Stocks When Their Valuations Are the Highest in More Than 10 Years

Be aware before you follow Buffett into airlines

February 15, 2017 | About:

Yesterday Warren Buffett (Trades, Portfolio)’s investment company Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) reported its 2016 Q4 portfolio. The company revealed that during the last quarter Berkshire drastically increased its positions in airline stocks: Southwest Airlines (NYSE:LUV), Delta Airlines (NYSE:DAL), United Continental (NYSE:UAL), and American Airlines (NASDAQ:AAL).

Amid this news, the stocks of the airline stocks jumped with large trading volumes. A lot of investors are following Buffett into airline stocks.

Before buying into the stocks, I hope that investors realize that the valuations of the airline stocks are not cheap as they seem to be. Let’s take a look at Southwest Airlines, the most reputable company and the only airline company that has been profitable during last recessions. The P/E ratio of Southwest Airlines is currently 16.3, which seems to be at the lower end of the P/E of the stock over the last 10 years. Please see the chart below:

http://www.gurufocus.com/chart/LUV#&serie=,,id:pettm,s:LUV&log=0&per=0

But if you take a look at the earnings of LUV, you may be surprised by how much the earnings have grown over the since 2014. The current earnings per share of LUV are about 7 times higher than they were in 2014. Please see the chart below.

But the revenue of LUV only increased by about 20% overall during the same period:

How can a 20% increase of revenue result in an earnings increase of 7-fold? It is the oil prices. Airlines have benefited tremendously from the lower oil prices during the last three years. Therefore its future earnings will also be dominated by the factors related to the prices of oil, which no one knows where to go.

For the cyclical businesses like airlines, P/S ratio gives a more accurate picture for valuation. Let’s take a look at the P/S ratio of LUV stock below:

We can see that currently the P/S ratio of LUV stock was at its highest point in more than 10 years. This is also the case for Delta Airlines:

And United Airlines:

American Airlines does not have 10-year history to show since its last bankruptcy.

We don’t why Warren Buffett (Trades, Portfolio) or his protégés bought the airline stocks at this point. Buffett has disdained airline industry many times in his shareholder letters, which we don’t want to repeat here. It is also unclear why they didn’t buy these stocks three years ago, when the stocks was more than four times cheaper.

But now, be aware, these airline stocks are at their highest valuations in ten years!

By the way, try our GURUF, the powerful Excel function for you to retrieve all financial data and create your research valuation charts in Excel.

About the author:

GuruFocus
Charlie Tian, Ph.D. - Founder of GuruFocus. You can now pre-order his book Invest Like a Guru on Amazon.

Rating: 3.8/5 (5 votes)

Voters:

Comments

DLV
DLV premium member - 1 week ago

It's pretty clear that Buffet himself has nothing to do with these stock purchases as he has allowed Coombs and Weschler considerable autonomy with their portions of Berkshire's investments.

fung9815
Fung9815 - 5 days ago    Report SPAM

DLV, Buffett has publicly declared that those airline purchases were largely his decisions, in the recent Charlie Rose interview.

Please leave your comment:


GuruFocus has detected 4 Warning Signs with Southwest Airlines Co $LUV.
More than 500,000 people have already joined GuruFocus to track the stocks they follow and exchange investment ideas.

User Generated Screeners


pbarker46Size, debt/equity, E10
DBrizanOUSA beater CDN 25FEB2017
pbarker46Historically cheap
pbarker46Low short % & Hist. PB
paulyew2003PRICE MOMENT GROWTH
vinsandhuROE2 euro
bpatton23Tech/Divid.
david_r_koenigGurus > $500MM
david_r_koenigROIC - WACC > $500MM Mkt Cap
david_r_koenigM-Score Non-Manipulators > $50
Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
FEEDBACK