Mac Greer trots out the theme of "Yes, No, Maybe So" for Motley Fool analysts David Kretzmann and Matt Argersinger. Each Fool tells us about a trend they feel bullish on, one they feel bearish on, and one that has them on the fence.
In this segment from Market Foolery, we hear about why Argersinger is upbeat on airline stocks. While consolidation and pricing power have shifted in the airlines' favor, the stock prices don't yet reflect the new environment.
A full transcript follows the video.
This video was recorded on May 24, 2017.
Mac Greer: Let's begin with, what are you saying yes to, Matt Argersinger?
Matt Argersinger: Mac, I'm saying yes to U.S. airlines. Never thought I would be on podcast or anywhere talking about my love for U.S. airlines. But, I was at the Sohn Conference a few weeks back, you and I talked about it a few weeks ago, the trend is so favorable right now for U.S. airlines. There's consolidation in the industry, the fact that the top four airlines now control 80% of the revenue, pricing power is back, there has been a massive swing toward profitability. And yet, the stocks, for the most part, are getting very low valuations in the market vis-a-vis other transportation industries like railroads, for example, or shipping.
Greer: And why is that? Just a lot of skepticism because of the history?
Argersinger: Right, you're talking about decades of poor profitability, bankruptcies, in a lot of cases, a highly competitive market. So, investors have gotten used to assigning a very low earnings multiple to the airlines. I think that's going to change. I think, with the pricing power that's back, airlines are already really profitable. We know that Warren Buffett, Berkshire Hathaway, has made an investment in a basket of airlines. I just think it's turning for the better, in the same way that railroads turned for the better a little bit over a decade ago. Another part of it is lower fuel costs, which we're going to talk about a little bit later in the podcast with my other theme. But, I think all of that points to very positive things for the airlines. So, taking a basket approach to the industry, or maybe buying one or two airlines, is probably a good bet today.
Greer: Do you have a favorite of the group?
Argersinger: I would go with United Airlines (NYSE:UAL). Not because of what happened ...
David Kretzmann: Because he's a sadist.
Argersinger: We all know about the incident that was all over the news, it was horrible. But, of the four major airlines, United stands out to me as the cheapest, has some activist investors interested in it, management changed recently, really turning toward the better in terms of margins. And it has a little bit of a gap between that and a Delta Airlines or Southwest Airlines, in terms of margins and multiples. So, I feel like there's a little bit more upside with United Airlines, so if I had to buy one of the major four, I would probably go there.
David Kretzmann owns shares of Berkshire Hathaway (B shares). Mac Greer has no position in any stocks mentioned. Matthew Argersinger owns shares of Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.