In this episode of Industry Focus: Energy, Nick Sciple chats with Motley Fool contributor Lou Whiteman about airline stocks and vaccine news. They also talk about airplane manufacturers, lessors, parts manufacturers, and much more.

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This video was recorded on November 19, 2020.

Nick Sciple: Welcome to Industry Focus. I am Nick Sciple. It's been a wild couple of weeks for the stock market, but stocks are up nearly 10% since the start of the month following positive vaccine news. Clearly, this is good news for humanity, but what does it mean for the stock market, are beaten-down industrial stocks out of the woods yet? Motley Fool contributor Lou Whiteman joins the show to share some of his thoughts.

Lou, welcome back on the podcast.

Lou Whiteman: Great to be here.

Sciple: Great to have you on. Just to kind of run through the vaccine news quickly for everybody. On Monday, November 9th, Pfizer announced that its vaccine candidate, developed in partnership with BioNTech, had a 90% effectiveness rate on combating the coronavirus without serious complications. They've updated that since to 95% effectiveness. Then, literally the next week, Moderna announced positive early data on its vaccine candidate with 95% effectiveness. Both of these are using so-called mRNA vaccines which use an mRNA molecule to deliver the vaccine. And while these vaccines have been in development for years, these would be the first licensed safe and effective vaccines used with mRNA technology. So, very exciting development. Lou, what was your reaction to the news as it's come out the past couple of weeks?

Whiteman: So, that's exciting, right? The short answer is, well, there's a lot that needs to be done, and especially some of the companies we're going to be talking about, it's going to be a long process to get back to normal, but it feels like a milestone. Even though we knew vaccines were out there, it feels like, OK, it's gone from just indefinite to maybe we can put a timetable on it, which is a great feeling mentally.

Sciple: Right. We've spent a lot of time this year talking about airlines. You talk about this uncertain future, and maybe the vaccine gives us a little bit of a light at the end of the tunnel. You know, it reminds me back to, back in the Spring, Warren Buffett talking about selling all of his airline stocks because, given the impacts of the coronavirus, his forecast of the future was just too vague to make him comfortable owning the stocks going forward; it had changed his thesis.

How much clearer is the future now for airline stocks today, now that we see this light at the end of the tunnel with the vaccine?

Whiteman: Well, I think the big thing that this does is, assuming the vaccine comes through as we hope, it gives us, again, a timetable on when things could get better, and it makes us more confident about the downside. I believe, assuming this happens as we hope it will, we will survive without bankruptcy. So, there isn't the same risk that there was back in March that the equity values were all going to go to zero. It's still going to be a long recovery, but at least now we can start talking about what that recovery will look like instead of just watching the whole industry in chaos and gripped with uncertainty.

Sciple: Right. When we talked about what this recovery is going to look like, there was a quote that was going around from Bill Gates on Tuesday, this is after the vaccine news had come down, where he said he thinks in a post coronavirus world that business travel will be down 50% or more. Obviously, business travel is very significant for airlines. What do you make of this quote, should airlines be concerned about a decline in business travel going forward?

Whiteman: I am, by my nature, skeptical about almost all of these predictions that nothing will come back. I don't think that that's human nature. I'm sure there will be changes. I mean, we'll just counter that with, again, a couple of very biased people, but two airline CEOs. Southwest (NYSE:LUV) CEO, Gary Kelly, went on CNBC this morning and said, my opinion is this too shall pass, just like 9/11. Everyone said the world was going to change, people aren't going to fly, they were wrong. Scott Kirby, the CEO of United Airlines, was talking about the earnings call. The first time someone loses a sale that they tried to do on a Zoom call, they'll be buying an airplane ticket the next day.

I mean, I don't want to be too smug, I think things will change, but I do think we will see a return to business, maybe we lose some business travel, but maybe if people are working remotely, they need to fly to check in with headquarters where they -- you know. So, there could be shifts, there could be changes, but I believe Gates is off, I don't think we're going to see a 50% decline long-term.

Sciple: So, yeah, I think it's similar to, kind of, telehealth where some of the people have been forced to adopt this technology, and so people are more aware of the substitutes that are out there, so maybe that'll change behavior. I don't know about a 50% decline, but we shall see. This is a year of, you know, me being surprised repeatedly, so I wouldn't be shocked if I was surprised again.

So, as we look out into this future, we can kind of see a path forward for airlines, is this a time where we can pick out some winners and losers of this recovery?

Whiteman: Yeah, you know, it's funny, and it does make sense. For most of this period, the airlines have traded together, they haven't traded on individual company news, they've traded on their just, kind of, existence. I believe we're starting to see separation; I think we're going to see more of that. It's time to start thinking, who recovers first, who recovers better? It's kind of the way I think of this is, who's sandboxes this, who wants to play or who is well set up to play in the market that we're likely to get? If you look at Southwest, they have been very aggressive. Southwest, historically, has been brutal during downturns, vicious, and I mean that with the most respect possible. And they're doing it again, they've added nine new destinations since the pandemic began, two of them, Houston and Chicago O'Hare are big United hubs. They see weakness, they are aggressively going for it, they have a great balance sheet, they can recover sooner. Southwest is also in talks with Boeing (NYSE:BA) to take some of the jets that maybe Boeing can't find a home for. Again, trying to get a deal from Boeing. This is how Southwest operates, and this is why it's been such a great stock over the years.

We have other companies; Delta (NYSE:DAL) is trying to differentiate itself. It's the only airline blocking middle seats through next March. This is giving up near-term revenue to try to establish itself as a premium brand or a trusted brand. It'll be interesting to see if it works.

And then you have other companies that are well-suited for, I think, the environment that we are going to see. Spirit Airlines is one I keep coming back to, that they are the lowest cost operator, a lower cost operator than even Southwest. They live and die on leisure travel, which is what's going to come back first. We have already seen them start limited international Caribbean coming back. I think, you know, Spirit may not be the best airline to own for the next 15 years, but I think over the next year, they're going to be back to normal a lot sooner than some of these others, and I would think that their stock would show that in the quarters to come.

Sciple: So, yeah, when you mentioned Delta, do you think we'll see that in their marketing of, you know, we're the only company that's still blocking middle seats? Like how we see with Apple, you know, we're the company that cares about privacy.

Whiteman: I think so. We've already seen it on their Twitter, their Twitter was, you've asked, we're listening, was the message they put out yesterday. And you know, I mean, I don't think you're going to see ads with maybe, if you fly United, you're going to have a guy with a cold next to you. [laughs] You know, I don't think they're going to be that blunt, but I think they are really going to try to trumpet it, especially through the holidays. We'll see if it works. I'm in Atlanta, so anything I hear on Delta is going to be biased, [laughs] so I can't really tell you if it works nationally.

Sciple: Yeah, I do think it's particularly interesting to see Southwest using this weakness to take market share, historically it's something this company has done. Do you think they're an interesting company to invest in today, given their ability to exploit some of this weakness other folks are facing?

Whiteman: Southwest is the best airline to own just as part of a conservative long-term portfolio prior to this, and it continues to be so. Yeah, this is their playbook, they can't do what they used to do where -- I mean, in their early days, they would go into a market with lower fares and just, you know, devastate the competition. The competition has, kind of, caught up. So, how they get their competitive advantage now is by being nimble and by using that balance sheet they have. So yeah, they can expand before United does, they can cherry pick some United routes in Houston and Chicago; I think is what they're doing. This is the modern Southwest. And, yeah, this is why this company just continues to be the best performer, it's when you have the balance sheet, when you have those strengths, use them, and that's what they do; they do that very well.

Sciple: Yeah, the quote that comes to mind for me is, you know, for any of the Game of Thrones fans out there. So, Petyr Baelish, Littlefinger says chaos is a ladder. And in this case, chaos is maybe a ladder for Southwest. So, about a month ago, we did a podcast where we talked about AerCap and aircraft lessors as an interesting play on a potential recovery, and just a long-term play on aerospace in general. [laughs] And AerCap, in particular, has responded incredibly well to this vaccine news. The initial day the vaccine news came out, it popped as much as 30%. Now, it's up 56% since the start of November. How does this change the story, if at all, for AerCap and the lessors?

Whiteman: When we talked about AerCap we said this really looks mispriced. And I think the market is slowly waking up to that. I mean, I'm not sure it's fully baked yet already, but yeah, that jump is, I think, the direct result of people being too pessimistic.

AerCap, basically, there's two ways they make money or just two ways to look at the business. They get to look at the portfolio value of their +1,000 airplanes that they own and the lease revenue they bring in on those planes. The lease revenue has been really hurt by this pandemic, you have a lot of customers going to them begging to skip payments, to defer payments, they saw $430 million worth of deferment requests in the first half of 2020. That surprisingly fell dramatically in the third quarter; they only had 56 million in new deferment requests. Even if the airlines can't get profitable, any vaccine news, any slow uptick in flying, that should raise revenue coming in and it should lessen the need for deferments. And so, this is a huge positive.

The other side of the business, the portfolio value, that's going to take longer to return. They did a $900 million charge to write down plane values in the third quarter. The good news is, they think that's the bulk of what needs to be done, they have plenty of assets to borrow on, even with that write down, if they need more liquidity, they have good liquidity. But in terms of the state of the business, the more revenue the airlines have coming in, the better the chances they can pay their bills on time, and that's good for AerCap, which is a big, big collector [laughs] from them in terms of it's a major bill.

Sciple: Right. When you talk about those portfolio values, part of that is because, you know, maybe there's a little bit of an oversupply of planes in the market. And that brings us to Boeing, obviously, has been a lot in the news the past couple of years with the 737 MAX. We just got news from the FAA that they're going to allow the 737 MAX to return to flight. Boeing is another stock that's up significantly since the beginning of the month, following this vaccine news. Does this change that narrative for Boeing or are we still looking at an oversupply of planes for a while?

Whiteman: We are, I think, unfortunately. I mean, for one thing, this 737 MAX news is very important news. This is the big milestone on the path for recovery. But as you say, there's a lot of supply, not a lot of demand right now, so it's going to be a long recovery. Boeing bled through $15 billion in cash in the first nine months. I mean, part of that is expenses due to COVID, part of that is expenses due to the MAX, but a lot of that is just the lack of revenue coming in because they can't deliver planes in the case of the 737 MAX, and there isn't a lot of demand for the planes they have and the ones they can deliver.

This is going to be a long process. They have +400 737 MAX that they built, but they haven't been able to deliver. We've seen orders cancelled; I think more could follow. So, this is the beginning of a very long process, but this, I think, marks the bottom for them, [laughs] or I think we're past the bottom, which is very good news with the way the stock has fallen.

Sciple: Yeah, I do think it's interesting for Boeing, if you look out over the course of maybe the last couple of years, you went from a period of where everybody is lining up to buy Boeing planes, there's a backlog, you know, they can't them out of the door fast enough. And Boeing in that situation really has all the leverage as the supplier. And now things seem to have shifted a little bit, where you're talking about Southwest putting the screws on Boeing a little bit, and there being an oversupply of planes, them having to reach different terms with companies, so it's interesting to see how things have shifted just over the course of a couple of years.

Whiteman: And let's be honest, this is how it works downtown. I mean, a lot has been made of the backlog they have. Now, for one thing, almost 80% of that backlog is the 737 MAX, so that goes to show you the importance of getting this plane going. But in past downturns, we haven't really seen the backlog fall apart. We have seen deliveries slow, because airlines will go in and defer orders. That's what we've seen this year, and especially with the leverage the customers like, whether it be the AerCaps or the large buyers the airlines have, they are owed compensation on the 737 MAX. They can go into negotiations now with Boeing and say we'll forgo some of that late fee if you let us defer this order out three years, so we can get our balance sheet in order. That is good news for Boeing, because it stays on the order books, so you can post a big number, but it does very little for the health of the business in the near-term over the next few years.

And that's really the risk. People have really been overrating, I think, the order book in terms of when Boeing will recover, because it misses the deferral side of this, and the fact that, yeah, those orders are still out there, but if you're pushing them back three, five, seven years, they do very little good for the business right now when they need it more.

Sciple: Right. You got to collect those payments sooner or later, right? The entitlement to the payments is one thing, like, when are those payments going to come due, right? That's like that accounts receivable; if those receivables don't come in, then it's not as big of an asset as you think.

So, the last one, kind of the aerospace arena, we've seen lots of volatility in some of these parts manufacturers, whether it's TransDigm, Heico. Raytheon Technologies is another one now, more of a hybrid business, so how does this change the thesis for those companies?

Whiteman: We've been saying since the beginning that we think the aftermarket is going to come back first. And aftermarket, for people who know, these are the sale of basically spare parts to airlines and other customers versus parts that go to Boeing for new jets. I still think the aftermarket is the place to be. Some new orders are going to come in, but for the most part, as these airlines ramp back up, they're going to be using older jets, jets in the fleet, some cases jets that have been parked where they need new parts to get them back up and running. This is the first part of a comeback, and is going to be the aftermarket. TransDigm is a huge player in this, and they are a company that really looks set up well. This is a PE firm that's disguised as an aerospace business basically. It's got a long track record buying small companies, getting better performance out of them, and including them in the portfolio. It's a manufacturer that was able to sustain +40% margins even during a pandemic, which is unheard of in aerospace manufacturing. [laughs]

This is a company that has always been a dealmaker, it has rarely had this much cash on its balance sheet, it is really worried about, you know, that this is the rainy day, but it's got upwards of $7 billion to deploy. And I guarantee you, based on their history, they're not going to sit on it. I would think maybe they're looking at deals, they do not pay a regular dividend, but they have a long history of one-time special dividends that can be very large. I am very excited as a shareholder in TransDigm to see what they might do with this money. And this is just, this company should be very well positioned with their cash balance, with maybe weakness, so they can get a good deal on some assets. This is a company that should really recover ahead of the curve for commercial airspace, I think.

Sciple: So, are they one of the ones that you would say, like, we talked with Southwest, where they're aggressive, they see the opportunity and they push in, where this is a company that, you know, the chaos is a ladder type company?

Whiteman: Yeah, and they are looking for very specific things. The way they get those margins, they are looking for components, parts that are valuable enough that airlines need them, but aren't in demand enough that they're worth someone coming in and commoditizing, you know. I mean, they're not making fasteners or bolts, they're making very specific parts where they either have patents, it's proprietary or just, I need it now, but I don't need many.

So, they're a tough company to get your head around, because it doesn't -- I mean, for the last 15 years the criticism on them, this isn't sustainable, and yet here we are. [laughs] And I think that's going to be the big knock on them for the next 10 years is how do you continue to do this. They're very good at what they do.

Sciple: All right. So, that's kind of our aerospace impact of the vaccine on those subsectors, wanting to talk quickly about some other sectors. We look at real estate, in particular, I think it is one where we have some questions. Bill Gates, I mentioned that quote earlier where he thinks we're going to see a 50% decline in business travel, he is also forecasting that 30% of days in the office will go away following the pandemic, which impacts, both, residential real estate and commercial real estate. I'd say, from my perspective, last week we talked about Redfin and this kind of surge in demand for suburban homes, that sort of thing. I don't think that's going to turnaround just because of some of those demographic trends we see in the millennial generation, which is now the biggest subset of U.S. demographics when it comes to population, they're right in that meat of, when it's time to be a first-time homebuyer and when if you're going to have, you know, house and kids and that sort of thing, it's the time to do that. And we've seen that pulled forward by the pandemic.

But Lou, what do you think about commercial real estate? You're someone who's been working at home for +20 years, so maybe you have a have a different perspective on how necessary the office is, but do you think we're going to see one-third fewer days in the office, and if so, what does that mean for some of these commercial real estate companies, REITs, that sort of thing?

Whiteman: Do as I say, not as I do, [laughs] basically here. And again, I hate to argue with Bill Gates twice on one thing, [laughs] but I'm sure the workplace is going to change, and I'm sure we, employers post pandemic are going to have to, I guess, give more thought to worker flexibility. But that was a trend that was happening anyway. And since I can't argue with Bill Gates, I'll throw some other smart people at him. Reed Hastings at Netflix called the work-at-home pure negative. Satya Nadella at Microsoft, so we can get Microsoft versus Microsoft, said that he thinks home working kills creativity, it makes meetings pure transactional. I think these are the CEOs that are brave enough to say this. I think that that's a pretty widely held view.

The workplace is going to change, but I'm always amazed at how resilient humans are and how much we get back to normal once we can. And I would be really, really surprised if there is the dramatic difference that some people see right now when we're stuck in the middle of it.

Sciple: Yeah, I would agree with that. I would say, humans are very eusocial creatures, we like being around each other, and that's kind of part of what humans like to do as a species. And so, I think being social is a big part of what brings us joy. So, I think we're going to find ways to do that. I don't know.

One other subsector that I think is interesting to think about as well on those habits is shopping. We've seen for years and years and years this continued growth in retail and e-commerce, and obviously, there's been a huge spike this year. FedEx and some of these other transportation companies talking about, you know, we're seeing unprecedented amounts of volume pushing through their network. So, what do you think about the future for transports, e-commerce and their role in the economy going forward, is that permanently changed or will that normalize following a vaccine?

Whiteman: You know, it's funny, because we go back to the early days of e-commerce, the stealth way to "play that" was with these transport companies. And I think it's still true today, maybe even more so, because everybody, the Targets and the Walmarts are figuring out how to be omnichannel, and how to compete with Amazon. Some of this surely is a one-off. FedEx saying this will be a peak like no other, that's them saying that this is a special year, but I really think that this was just a pull forward of an inevitable. Malls will come back some, but I think a lot of this is going to stick. And I'm really interested. I mean, XPO Logistics is one we've talked about a lot, that is trying to help out these non-Amazon retailers with their logistics and fulfillment. I think a lot of this is permanent. And I do think it's one of these super trends that you can jump on as an investor. Because be it, FedEx, UPS, XPO, the railroads, some of the trucking companies. I think this is a new normal. I think e-commerce, obviously, was going to grow, I think even if it falls back in 2021 a bit, it's going to be at an inflated level going forward and it's going to slowly creep forward. And I think the transports are a necessary part of that, and an interesting thing to look at.

Sciple: So, we've gotten news in the past week or so that Amazon is increasing its investment, pushing more into trucking, what do you make of the opportunity there for them, and Amazon's threat to some of these other businesses, whether it's UPS, FedEx, or XPO?

Whiteman: So, Amazon, just like with their AWS, where they're trying to turn a huge cost into a profit center or at least reduce their costs. That's what they're doing in transport now, and it's very interesting. I am skeptical that if I'm a Target, I really want to give Amazon the keys to that kingdom, so I think for some of the big customers, there's plenty of business for the XPOs. I'm sure it'll fit in some, but Amazon, I wouldn't want to be a middleman for Amazon based on their history. I think they can make a dent, but this is a highly fragmented market. I think there's room for growth here with everyone. It doesn't make me less bullish about my investments in XPO, and FedEx, and things like that. But certainly they need to be reckoned with, you don't take them lightly.

Sciple: Yeah. So, what I would say is, when you see Amazon push into an area, I think one thing you know for sure is there's lots of opportunity to reinvest and grow in that space. I think Amazon doesn't push anywhere unless there's significant opportunity there. So, obviously a lot of these stocks often sell-off when you hear Amazon is pushing in. I remember when Amazon was moving into pharmacy, there was Amazon pharmacy news this week, it sold-off a significant number of stocks. But that's just -- oftentimes we'll see some of these companies actually perform quite well. Like, Netflix sold off a whole bunch when Amazon Prime Video came out, and obviously Netflix has been a fantastic performer, even though Prime Video has been a success.

A couple of last questions before we go away, Lou. Obviously, it's been a crazy, volatile year. We opened the year with stocks at all-time highs, and then a pandemic, an election, vaccine news, lots of volatility. What's one lesson that you can take away from this year as a long-term investor going forward?

Whiteman: When I saw this question, I looked it up, because I wasn't sure, but I have not sold a stock so far in 2020. And honestly, I sort of regret that, because if I would have seen what was coming, I have a couple of aerospace investments that have just been clunkers, [laughs] and I don't know when they're not going to be, but you know, at this point they're down now, so why not keep it. But a lot of them that I probably would have sold if I knew how long this would be back in March, have come back, and some of them are even in the green for the year now. And I think that is a lesson about -- you know, and in part, because we have trading restrictions, by the time [laughs] I wanted to sell, I was writing about them every day and I couldn't. The trade restrictions were my friend.

And you know if your thesis changes, there are times to sell. I'm glad I didn't sell. And I think it is a reminder to have the long-term mentality and ride the wave.

Sciple: Yeah, I would have done better, probably, on some of my investments had I not sold anything this year, and yeah, I think that's great advice. And I think one of the things that I think is a big takeaway for me is just, things always change quicker than you expect. And then on the other side is, when you expect things to change really quickly, they'll surprise you by how little they change. And so, I think this year we got one of those. And I think maybe coming out of this, we've got a lot of expectations for change, maybe there will be less than we expect, but we'll see.

Whiteman: Yeah, just on that. I always try and think of the world. It's like we're always just riding on this huge pendulum, and it's amazing to me how little we realized that we're eventually going to swing back when we're going one way. And that's really the secret to investing long-term, just to ride that pendulum and don't assume the momentum in one direction is indefinite, even if it feels that way in the middle of a pandemic.

Sciple: Yeah, and on that point, if anything we've predicted on this show ends up being wrong, that's a lesson to take away as well. Lou, one last question for you, we're having our Virtual Writers Conference this week for writers. For anybody who's a writer out there, do you have some advice for them on how they can make their writing better or be more successful?

Whiteman: You know, writing is a conversation, and do the best you can, don't try to look smart, don't try to be too technical, just have a conversation, explain something if that's what you're doing, but just -- I think most bad writing takes itself too seriously. [laughs] And you know, I'm sure the copy editors would [laughs] disagree with that, but it should be a conversation, and I think it is the most helpful, it's most enlightening when it is.

Sciple: Awesome! Lou, well, thanks so much for joining me on the podcast. As always, looking forward to having you on again the next time.

Whiteman: Always a pleasure.

Sciple: As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against the stocks discussed, so don't buy or sell anything based solely on what you hear.

Thanks to Tim Sparks for mixing the show. For Lou Whiteman, I'm Nick Sciple, thanks for listening and Fool on!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.