Delta Air Gets Buffett's "Seal of Approval"

10/27/2017 5:00 am EST


James Pearce

Director of Research, Investing Daily

The share price of Delta Air Lines (DAL) — a holding in our Growth Portfolio — has been all over the map this year, bottoming out below $45 in April before soaring above $55 only three months later, notes Jim Pearce, editor of Investing Daily's Personal Finance.

At the end of July, before Harvey and Irma began forming in the Atlantic, the price of oil closed at $50.41 a barrel. On October 3, the same day Delta released its earnings revision, oil traded at $50.05/bbl.

However, by late August DAL was once again fighting to maintain altitude above the $45 level as Harvey, and then Irma, took dead aim at Delta’s primary market in the southeastern U.S.

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The stock jumped more than 6% when the company issued a statement that business disruption from hurricanes Harvey and Irma was less severe than initially feared.

Despite Hurricane Irma, third-quarter revenue rose 5.5% to $11.06 billion, better than analysts anticipated. Although Harvey made a direct hit on Houston’s refineries, the impact on fuel prices was less than feared.

Even longtime airline sceptic Warren Buffett recently jumped on the Delta bandwagon. His Berkshire Hathaway (BRK.A) investment company holds $2.8 billion of DAL, which makes it Delta’s largest institutional shareholder with a 7.3% stake in the company.

Buffett reversed his thinking on airline stocks a year ago, opening similar-sized positions in United Continental Holdings (UAL), American Airlines Group (AAL) and Southwest (LUV).

Buffett’s seal of approval on a stock is helpful, provided he sticks with it. In this case, I think he will. By gaining roughly equal exposure to the aviation and energy sectors, Buffett has neutralized the effect of highly volatile oil prices on his overall portfolio.

Thanks to the world oil supply glut and the rapidly expanding electric vehicle market, the prospect of drastically higher aviation fuel prices anytime soon appears unlikely. And if a corporate tax cut is forthcoming, Delta would benefit more than most given its 34.5% effective tax rate last year.

Reflation or no reflation, there should be nothing but blue skies ahead for Delta that not even the occasional hurricane can ruin. We’ve racked up a total return of 73% in DAL since adding it to our portfolio three years ago. But even after the recent bump, buy Delta up to $50.

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