Here’s Why Warren Buffett is Buying Airline Stocks

Unless you’ve been living on another planet, you’ll know that CNBC reported Berkshire Hathaway recently released SEC filings showing that the company has taken a stake in three of the four major airline companies — American Airlines, United Continental Holdings and Delta Air Lines.

CNBC also reported exclusively that Berkshire also has taken a stake in the fourth major carrier, Southwest Airlines.

This came as no surprise to us as twenty percent of the stocks currently showing in our Large Cap 1000 Screener, which you can register for here, are airline stocks.

The reason that these stocks appear in our screen is because they’re currently undervalued. But that’s not the only thing that’s appealing about airline stocks right now.

Here’s what Bill Miller, portfolio manager at LMM, had to say about airline stocks on CNBC:

And, I have to agree with him.

Take a look at the free cashflow/ EV yields for the top five airline stocks from the Large Cap 1000 Screener (below) and you’ll see that four of the top five have FCF/EV yields close to 10%.

Amounts in millions
Acquirer’s Multiple®	Symbol	Company	EV	Op. Earnings	FCF (TTM)	FCF/EV Yield	Shareholder Yield
5.06	DAL	Delta Air Lines, Inc.	$39,502	$7,799	$4,084	9%	8%
5.12	JBLU	JetBlue Airways Corporation	$6,852	$1,340	$634	9%	1%
5.29	UAL	United Continental Holdings Inc	$27,602	$5,214	$2,893	10%	4%
5.98	ALK	Alaska Air Group, Inc.	$8,554	$1,431	$889	9%	6%
6.86	LUV	Southwest Airlines Co	$28,320	$4,126	$1,734	6%	6%

Something that Miller didn’t mention is that four of these top five stocks are also showing nice shareholder yields in excess of 4%. Shareholder yield is defined as (Buyback yield + Dividend Yield).

So, there’s a very simple case for Buffett purchasing airline stocks right now. Even though he’s been reported as saying, “The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, then earns little or no money. Think airlines. Here, a durable competitive advantage has proven elusive since the days of the Wright brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.”

Having said that, these are undervalued stocks with loads of Free Cash Flow providing a nice shareholder yield.