U.S. Markets closed

Buffett's Next Buy Might Be Delta Air Lines

- By Rupert Hargreaves

Towards the end of last year, Charlie Munger (Trades, Portfolio) took part in an interview with Chinese investor Li Lu for one of China's premier financial publications.


Responding to a question about Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B)'s decision to build a position in consumer tech business Apple (AAPL), Munger stated that every investor should be prepared to change their views on the world and the companies they like, as time progresses and the world changes.

237119547.png

As industries and sectors change, investors should adapt to this change because, if they don't, they risk being left behind, and this is not a sensible investment strategy.

Munger went on to add that the team at Berkshire invests in "whatever we can find with our abilities," which sometimes leads the company into "odd" businesses. He gave two examples: the airline industry and railroad industry. Commenting on the airline industry, Munger said that Berkshire decided to start buying airline stocks because the conditions in the industry have "changed a little" and the stocks had become "so cheap" that Berkshire was willing to start buying, even though Buffett and Munger have spent decades saying that they will never invest in airline stocks.

The same happened with Berkshire's railroad investments. "Warren and I hated railroad stocks for ages. But the world changed," Munger said. "We changed our minds because the facts changed," he concluded.

Berkshire buying an airline?

Listening to these comments got me thinking, could Berkshire Hathaway's next large acquisition being airline?

This is something Wall Street has asked before. Buying an airline may make a lot of sense considering the way the industry has changed over the past few decades and the cash generative nature of these companies today.

Any airline acquired by Berkshire will also have an advantage over the rest of the industry because it will be linked to the Buffett's conglomerate's balance sheet, which should give it a much lower cost of capital to expand, and better terms with creditors. In an industry where every 0.01% of margin matters, the competitive advantage achieved by these benefits could be enough to help any airline carve out a lead over competitors.

If there's one airline Berkshire is more likely to purchase than any other, it has to be Delta Air Lines (DAL).

The signs are all there. The conglomerate already owns $3.6 billion worth of stock in the airline, meaning that the group now owns more than 10% of the business.

718230884.png

What's interesting, and perhaps only reinforces the argument that Buffett might move to buy the whole business, is the fact that the Oracle of Omaha broke his unwritten rule of not going over the 10% ownership level earlier this year. Commenting on this in an interview with CNBC at the end of March, he said:


"What I didn't realize was that that purchase had taken us over 10%. I was already in territory I didn't plan to get, so I just decided to buy a whole lot more stock."



A real "mistake"?

The combination of Buffett's buying and Delta's only share repurchases helped push Berkshire's ownership over 10%, but I'm skeptical that Buffett really made a "mistake" here.

The Oracle of Omaha is undoubtedly the world's greatest investor, having turned $100,000 into a conglomerate worth more than $500 billion, and while doing so, he has established himself as one of the greatest business minds in the world. He's also known for his skill with numbers. It might have been a genuine mistake, but it's probably of an indication that Buffett really likes this business and wants to open as much as possible at the lowest possible price.

I'm not saying a deal will emerge anytime soon, and it might not emerge at all, but all the signals are pointing in the right direction. Buffett really likes airlines, especially at today's prices, and if someone came to him today and offered him a deal, I don't think he would pass it up. It is something to think about anyway.

Disclosure: The author owns shares in Berkshire Hathaway.

Read more here:

The 'Red Flags' to Look For With Potential Value Traps

Value Stock or Train Wreck

Revisiting The Superinvestors of Graham-and-Doddsville

Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here .

This article first appeared on GuruFocus.