Warren Buffett to investors -- avoid gruesome industries.
In his 2008 annual letter to shareholders, the chairman of Berkshire Hathaway
Air carriers can enjoy rapid growth, but they require enormous invested capital and often provide little or no return on that capital. Accordingly, he refers to the industry as a "bottomless pit." Noting that he participated in the "foolishness" of buying U.S. Air preferred stock in 1989, Buffett luckily bailed with a handy profit during a brief but misguided period of enthusiasm for the industry before U.S. Air went bankrupt. Twice.
His classic humor is woven throughout the letter. Buffett says, "Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down."
A world without wings?
This comment piqued my interest. Aren't there a few companies in this sector that offer promise, or is air travel a predestined value trap for unwary investors?
Not being an airline expert myself, I took a stroll over to the Motley Fool CAPS community to see if any stocks in this sector are worth taking out for a spin.
An Olympic play
Two Chinese airline stocks have roughly doubled over the past year -- China Southern Airlines LTD
Both stocks are awarded two stars (out of five), and hit high water marks last fall, but have tumbled precipitously since then. And rightly so. China Eastern isn't profitable and sports a whopping EV/EBITDA multiple of 17. Meanwhile, China Southern is barely pulling in a positive bottom line and, with its hefty debt load, its operating profits are only about 30% of its interest payments. To me, it seems these stocks have been caught up in the Olympic hype that has sent the valuations of many Chinese stocks sky high.
Not your typical airlines
Unlike the typical airline model, Republic Airways Holdings
No worries about fuel costs here. Just fly the routes on time, with correct baggage handling, and few customer complaints. How has that worked out? Pretty well -- the company maintains margins far superior to the airlines it enters agreements with and has grown revenues 29% annually for the past five years.
Looking for LUV
Finally, I can't ignore Southwest Airlines
I'm not ready to recommend these stocks -- it's hard for any Buffett admirer to argue with his logic or amazing long-term success. But as Buffett's own recent moves into railroads show, even you can never say never for finding value even within traditionally weak-performing industries.
I do recommend, however, that you put the community-intelligence database that is Motley Fool CAPS on your radar screen. Free to register and play, CAPS is thousands of investors coming together to share their thoughts on the companies we all care about. Take off with CAPS today.
For related Foolishness: