With the global travel sector being heavily impacted by the ongoing coronavirus, many decided to sell off their airline shares, dropping prices by up to 30%. Warren Buffet spotted an opportunity in the selloff and decided to do the opposite, purchasing $45.3 million worth of Delta’s stock.
Airline stocks are tumbling
Many investors fear the impact that the global halt in travel will have on airlines. The key reason is the naturally weak liquidity of the sector coming from high fixed costs and low margins. The worries seem legitimate.
IATA’s data from January has already showcased the possible impact of the virus. Passenger demand growth in January was one the slowest in recent years, even despite the fact that the outbreak really started in February.
The prolonged stall in ticket sales could lead to bankruptcies, an example of which we witnessed yesterday when Flybe went bankrupt. Even though the pandemic was not the underlying cause, it definitely was a tipping point. At the moment of writing, Delta Air Lines’ stock is down by 27% from its January 2020 peak.
Why did Berkshire purchase the shares now
Warren Buffet is known for his successful investing approach, which made him the fourth-richest person on Earth. He calculates the intrinsic value of the firm and compares it to the stock market price. If the stock market price is significantly below his valuation, he buys. So, it seems that the current valuation of Delta is below what he believes is the correct one.
According to the SEC filing, on the 27th of February Berkshire bought 976,507 shares for an average price of $46.40. At the time of writing, the stock is trading below $45 (down 8% for the day).
A long term relationship
It is not the first time that Buffet decided to purchase some of Delta’s stock. Back in 2016, Berkshire started acquiring multiple airline stocks, including those of Delta. In fact, Berkshire now owns 71.9 million shares, or about 11.2 percent of the entire company, which is around $3.2 billion. Berkshire owns a higher stake in Delta than anyone else.
Interestingly, in 2016 when Berkshire started acquiring airline shares, Delta Air Lines was not the only airline chosen by the firm. According to SEC’s 13F file, the firm holds a 10% stake in American Airlines (worth $700 million), a 10.4% stake in Southwest Airlines ($2.4 billion) and an 8.8% stake in United Airlines ($1.1 billion).
Of course, we do not know the exact reason why did the investor from Omaha chose to invest in all four carriers. However, we can assume that it was most likely to spread the risk of an investment and/or to have a good starting position from which more shares on an eventual industry leader could be purchased.
If the shares continue to fall, could Buffet buy more of Delta’s shares? Only time will tell.
Why Delta Air Lines?
Delta seems to be an obvious market leader now, with strong profitability and an efficient structure. Furthermore, the company is loved by its employees, partly thanks to the $4 billion bonus they received, and also by its passengers. The airline has improved in almost all operational areas in 2019 and, coronavirus aside, is set to have a great year this year too.