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Stocks, Trading  | May 12, 2020

On May 2nd at Berkshire Hathaway’s annual shareholder meeting (also known as Woodstock for Capitalists), in rather dramatic fashion, Warren Buffett announced publicly that Berkshire had unloaded its entire positions of airline stocks. It amounted to a roughly $4 billion fire sale of the leading domestic players – United Airlines, American Airlines, Delta Airlines, and Southwest Airlines.

As you know, Mr. Buffett isn’t known for making rash or snap decisions on his holdings. It’s been widely known that his favorite holding period is forever. In Buffett’s mind, this about-face boiled down to a belief that the world had quickly changed for airlines, which have essentially seen demand for air travel evaporate in the face of the coronavirus pandemic.

Betting against Warren Buffett on any investment has historically been a very poor decision – despite a rough five-year stretch, Berkshire Hathaway’s average annual return of 20.3% since 1965 has trounced the stock market’s 10% over that period. So why consider a bullish bet on the airlines?

Global investment firm Deutsche Bank sees value in the airlines that Buffett recently shunned. Lead analyst Michael Linenberg noted, "We are of the view that [airline] stocks have likely seen their low points based on where they traded following 9-11. As we have indicated in past reports, valuations have become untethered from any sort of reasonable framework, particularly since 2020 is shaping up to be a “lost” year for the industry. As such, we are now starting to focus on next year when we expect the industry to experience a significant recovery."

To this end, the 5-star analyst cites three stocks that are particularly well-positioned to weather the storm. We cross checked the vital analyst information for these names on TipRanks database to get the rest of the Street’s take.

United Airlines Holdings Inc. (UAL)

Chicago-based United Airlines is the hardest hit of the four largest domestic airlines. Its share price has plummeted from over $95 to a recent $25.42. That’s a more than 73% hit from its highs and has pushed its market cap down to $7.4 billion. Operating conditions are rough right now, but in both Deutsche Bank and United’s opinion, will undoubtedly improve going forward.

Deutsche Bank's Michael Linenberg spent the bulk of his recent report on United detailing the actions management has taken to batten the hatches and shore up liquidity in case travelers take a very cautious route to return to flying. To indicate the tough near-term conditions but recovery potential in the industry, the top analyst noted: “at present, management does not see any signs of meaningful recovery in near-term demand. However, management believes there will be pent-up, long-term demand, as evidenced by the year-over-year increase in website searches for 2021 spring break travel.”

Linenberg noted United’s total liquidity of nearly $10 billion to ride out the storm for many more months until travel returns.

As a result, Linenberg reiterated a Buy recommendation on United Airlines shares, along with $54 price target that would equate to a more than doubling of the share price from current levels. Linenberg projects an earnings loss this year but recovery back to the black next year and EPS of $2. By 2022, the earnings prospects could be back to $6.50 per share. Note that this could take a couple of years, but given the potential upside, the annual returns could be stunning.

The TipRanks universe of analysts has a consensus price target of $55.60, or slightly ahead of Deutsche’s target. Five of the 12 analysts covering United have Buy ratings to indicate the stock could end up at least doubling from current levels.

Delta Airlines (DAL)

Delta Airlines is down nearly 61% this year and sports a current market cap of $14 billion. Its sales could fall 53% this year to $22 billion and earnings will be negative, but conditions are also expected to improve dramatically.

Linenberg also has a buy recommendation on Delta and $47 price target. This would also be a double from the current share price of $22.72.

Looking at the near term, Linenburg noted that new bookings are about matching refunds that customers are requesting. Baby steps in the right direction. Ancillary services are recovering somewhat faster due to the bookings.

Linenburg estimates that every 10% move in fuel prices impacts Delta’s earnings per share by $0.35. In case you haven’t noticed, oil is at historical lows. The analyst sees EPS of $1.65 next year and a big jump in 2022 to $6.  

Overall, TipRanks lists 13 analysts actively covering Delta. 8 have Buy ratings and a consensus price target of $40.67, which is 79% ahead of the current share price. This is slightly below Deutsche Bank, but would still represent a sizeable gains for holding the stock.

Southwest Airlines (LUV)

Southwest Airlines has “only” fallen 49% this year, which makes it the best performer of the top 4 domestic airlines. Its market cap has stabilized at $16 billion and sales will fall to about $11 billion this year.

Like the other airlines, the focus is on liquidity until travelers return en masse. Linenburg noted in his recent investment report that Southwest now has $9.3 billion in cash in its war chest. Jet fuel is again a major earnings component – every 10% move in fuel prices impacts Southwest’s earnings by $0.30. The analyst estimates total 2021 EPS of $1.20 and a big recovery in 2022 to $3.25.  

Linenburg noted that Southwest stands out for keeping its flight schedule largely set. Rather than make mass cancellations, “Southwest is choosing to cancel flights close-in, citing a 4-day horizon with respect to bookings and demand.” This provides some insight into the airlines’ reputation of being the most customer-friendly of the key players.

To this end, the analyst reiterates his Buy rating on Southwest shares along with a $44 price target, or 62% ahead of current levels.

Returning to the TipRanks universe of analysts, 9 of the 15 in its universe have Buy ratings on Southwest. The average price target is $44.67, or 64.2% ahead of current levels. That differs only slightly from Deutsche’s price target.

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