Berkshire Hathaway (BRK.A, Financial)(BRK.B)'s next 13F filing could have another hint.
In August, the company reported its portfolio activity was up to the end of June. Along with adding to his banking positions and Apple, Buffett added to his Delta (DAL, Financial) and Southwest Airlines (LUV, Financial) holdings, putting Berkshire as the largest shareholder in Delta and second largest in Southwest. He also reduced Berkshire's stakes in United Continental (UAL, Financial) and American Airlines (AAL, Financial). Of course, addition/reduction is inconsequential since Berkshire owns close to 10% of each of these airlines.
Delta Airlines
Revenue: $43.1 billion
Net Income: $3.4 billion
Total Debt: $11 billion
Market Cap: $34.4 billion
Southwest Airlines
Revenue: $21.3 billion
Net Income: $3.6 billion
Total Debt: $3.5 billion
Market Cap: $32.9 billion
United Continental Airlines
Revenue: 39.1 billion
Net Income: 2.0 billion
Total Debt: 14.5 billion
Market Cap: 21.5 billion
American Airlines
Revenue: $43.2 billion
Net Income: $1.5 billion
Total Debt: $24.1 billion
Market Cap: $14.6 billion
Based on today's numbers, Southwest looks like the clear winner, but unlike the others, Southwest is expecting lower earnings in 2018 followed by a rebound in 2019.
Delta Airlines
Stock Price: $49.71
P/E Ratio: 10.6x
2019 EPS: $6.76
Southwest Airlines
Stock Price: $57.33
P/E Ratio: 9.8x
2019 EPS: $5.07
United Continental Airlines
Stock Price: $78.93
P/E Ratio: 11.6X
2019 EPS: $9.83
American Airlines
Stock Price: $31.61
P/E Ratio: 10.9x
2019 EPS: $6.21
If you look at the trade from this perspective, American Airlines has the most upside potential as long as the 2019 numbers can be achieved. In that case, its stock could double in value. As always, and especially with Buffett's criteria, the amount of cash that can be extracted over the remaining life of the asset is what matters most. This intrinsic value estimate is extremely skewed in favor of airlines right now, as each of these majors are wildly profitable. However, as evidenced by the market's implied value, investors are skeptical of the long-term potential to continue consistently producing this level of results.
Which one WOULD Berkshire acquire?
Buffett has done a great job of keeping everyone in the dark (as he likes to do) regarding his intentions by ensuring that his position remains under 10% and thus avoiding insider reporting requirements that equity transactions must be reported to the SEC (and therefore the public) within two business days. It really feels like his team is doing a lot of work behind the scenes, or maybe Buffett is soul searching considering his history with the industry.
Despite the short-term hiccup in growth this year, Southwest has the least amount of debt and close to the same earnings potential as the others. It also generates the best return on invested capital, above 20% in each of the last three years. It also doesn't spend as much on capex and will likely earn more money over the next 10 years than the others, who I expect will suffer annual losses at least one or two times during that time period.
One thing is certain, with $105 billion in cash burning a hole in his performance-driven pockets, the Oracle of Omaha has to pull the trigger on something big very soon.
Disclosure: I am not long/short any stock mentioned in this article.
