Investment legend Warren Buffett is renowned for buying shares at times like these, when markets are crashing and bargain stocks are everywhere. He’s not averse to selling either.
The ‘Sage of Omaha’ has sold all his shares in major airlines, as international air traffic collapses due to Covid-19. Yet could Buffett’s move be a sign these bargain FTSE 100 stocks have finally hit rock bottom?
The billionaire investor offloaded his stake in four major US airlines, which he reckons need to borrow more than $10bn each to survive. UK-listed airlines such as British Airways owner International Consolidated Airlines Group, easyJet and Ryanair Holdings face the same headwind.
Bargain FTSE 100 shares for a reason
IAG recently posted a Q1 loss of €535m, down from a €135m profit last year. It has announced plans to cut 12,000 jobs, almost a third of its workforce, predicting the recovery in traffic could take several years.
Ryanair’s traffic fell 99.6% in April. It has announced 3,000 job losses and predicts a €100m first quarter loss, with more to follow over the peak summer period. Buffett is right to be fearful.
As Ryanair chief Michael O’Leary has bemoaned, the UK government isn’t offering the same level of support as Europe. Vueling, Iberia, Lufthansa, Air France and KLM could encounter a much softer landing, with a potential €31bn in total state aid. This could allow them to run at a loss when flying resumes, hitting UK-based competitors.
Would you defy Buffett?
Ryanair reckons it will take at least two years for demand to recover. Others don’t share its optimism. Airbus chief executive Guillaume Faury has warned it may be “three to five years” before passengers are willing to fly as before.
Management at easyJet has cash and loans totalling £3bn. But this is only enough to keep it going for nine months. Sir Stelios, who still holds a 36% stake in the company, angrily claims the board is too optimistic about the pace of recovery. He said: “There is no way the demand for passenger flying in 2021 will be the same as 2019.”Â
Ryanair had €4bn in cash at the start of the pandemic, but investors don’t know how quickly it’s burning through this. Morgan Stanley has given Ryanair 12 months. Could Buffett be right?
Here’s a note of optimism. IAG has a healthy €9.5bn of liquidity, having benefited from previous cost cutting measures, and boss Willie Walsh reckons it can survive without a state bailout. A ‘lean and mean’ IAG could come out of the crisis in a strong competitive position, and looks tempting at today’s bargain price, even without the dividend.
I’d avoid easyJet and Ryanair, but there could be a case for buying IAG right now. Provided you plan to hold for at least five years, and preferably far longer. It may be time to get greedy when Buffett is fearful.