Greg Abel Is Trying to Break Berkshire Hathaway’s Losing Streak on Airlines with New Delta Stock Bet

If you follow Berkshire Hathaway’s (BRK.A) (BRK.B) portfolio, you may be getting a bad sense of déjà vu. Because the famed conglomerate is back in the airline business — and this is a field that hasn’t worked out for Berkshire Hathaway in the past.

Berkshire recently filed its quarterly 13F report to the U.S. Securities and Exchange Commission. It’s the first under the leadership of CEO Greg Abel, who succeeded legendary investor Warren Buffett at the beginning of the year. (Buffett, now 95, is now the chairman of the board and still participates in some investing decisions, but he’s not running day-to-day operations any longer.)

The report showed a lot of changes. Berkshire exited stakes in more than a dozen companies, sold 35% of the company’s stock in Chevron (CVX), and 95% of its Constellation Brands (STZ) stock, while scooping up 40 million shares of Alphabet (GOOG) (GOOGL).

But perhaps the biggest surprise is that Abel had Berkshire buy $2.65 billion in Delta Air Lines (DAL) stock. Because this isn't the company's first foray into airline stocks. And it's been a struggle.

Buffett himself has commented in the past about how challenging the airlines are, writing in a 2007 letter to shareholders that the industry’s “durable competitive advantage has proven elusive ever 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.”

Let's look at Berkshire Hathaway's latest investment in the airline industry.

About Delta Air Lines Stock

Based in Atlanta, Delta is one of the biggest U.S. airlines, operating flights from more than 300 airports daily. Delta claims to operate 5,500 flights a day, including those on its Delta Connection regional partners. The company has a market capitalization of $50 billion.

Shares are up a whopping 65% in the last year, more than double the return of the S&P 500. Delta is also outperforming the other major U.S. airlines — American Airlines Group (AAL), Southwest Airlines (LUV), and United Airlines Holdings (UAL).

Delta also compares favorably with the competition on valuation, with a forward price-to-earnings ratio of 14.4x, versus 27.7x for American Airlines, 16x for Southwest, and 11.6x for United Airlines. The stock’s P/E has been slowly rising over the last year, so shares are above the three-year forward P/E mean of 8.4x.

Delta also pays a small dividend of $0.1875, or $0.75 annually. While the yield is only 1% now, investors should remember that Delta didn’t pay a dividend for more than three years following the COVID-19 pandemic, and its payout today is much improved from the $0.10-per-quarter dividend that Delta offered in 2023.

Delta Beats on Earnings

Delta has had a history in recent quarters of beating analysts’ expectations in its quarterly earnings, and the first quarter of the year maintained that trend. Revenue of $14.2 billion was up nearly 10% from a year ago and set a company record for the March quarter. Net income was $423 million, up 45% from a year ago, and earnings of $0.64 per share beat analysts’ expectations for $0.61. 

The company reported an adjusted fuel expense of $2.6 billion, which was up 8% from a year ago. But the company is somewhat shielded from spiraling energy costs as it operates its own refinery, Monroe Energy, which gives it access to 185,000 barrels of oil a day and pipeline assets on the East Coast.

“Delta is best positioned to navigate this environment, with a leading brand, strong financial foundation, and the benefit of our refinery,” CEO Ed Bastian said. “In the June quarter, we expect to lead the industry with $1 billion of profit. And while the recent fuel spike is currently impacting earnings, I'm confident this environment ultimately reinforces Delta's leadership and accelerates long-term earnings power.”

Berkshire’s History with Airline Stocks

Berkshire’s purchase of 39.8 million shares of Delta stock represents the company’s latest effort to profit from airlines. On the surface, it would seem to make sense for the conglomerate — Berkshire Hathaway already invests in infrastructure, energy, and owns a BNSF Railway, which is one of the largest freight railroad networks in the U.S. and Canada.

Under Warren Buffett, Berkshire Hathaway bought $358 million in preferred stock from USAir in 1989, but the airline immediately struggled and suspended its dividend within a year. Just five years later, Buffett was calling the investment one of his biggest errors, although he was eventually able to sell the shares at a profit.

Then in 2016, Berkshire invested in American, Southwest, United, and Delta, but the entire industry was crippled four years later during the coronavirus pandemic, and Berkshire sold all its shares in 2020, losing billions.

What Do Analysts Say About DAL Stock?

The Iran war and the subsequent bottleneck of oil tankers through the Strait of Hormuz have pressured the supply to energy companies, so I wouldn’t be surprised to see some belt-tightening for airline stocks. But analysts say that at least in the short term, the industry could see higher earnings should airfares remain elevated and oil prices stabilize. UBS analysts predicted that airline earnings could increase by 50% next year and raised their price target on DAL stock from $95 to $98.

So, against that backdrop, it’s interesting to see that analysts are overwhelmingly bullish on Delta stock. Of 24 analysts who cover the stock, only one has a “Hold” rating, and the rest have “Buy” ratings. Although DAL is trading at the mean price target of $82, I would anticipate more analysts raising their price targets for Delta soon.