Boeing Is Just Too Hard to Predict for Warren Buffett. What That Means for Aerospace Stocks.
By
Al Root
May 3, 2020 11:51 am ET
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A model of a Boeing 777X is displayed during the Farnborough Airshow, south west of London, on July 17, 2018.
Photograph by Ben Stansall/AFP via Getty Images
Warren Buffett knows
commercial aerospace. His
Berkshire Hathaway owned—until recently—large stakes in
major U.S. airlines. His company also owns a large aerospace supplier: Precision Castparts. But it doesn’t look like he’s is going to add
Boeingstock to his list of holdings any time soon.
“We shut off air travel in this country. And what that does to people’s habits, how they behave in the future, it’s just hard to evaluate. I don’t know the answer,” said Warren Buffett at Saturday’s Berkshire Hathaway (ticker: BRK) annual meeting, answering a question about the downturn in commercial aerospace. “If you think
about Boeing, it is one hell of a company...we hope for the best and we wish everybody the best, obviously, and we wish ourselves the best in [aerospace], but part of [our success] is out of our—certainly out of our control.”
Buffett added it’s especially hard to forecast demand for new commercial jets in the future. That sentiment isn’t a surprise. The entire aerospace value chain has been hammered by the
Covid-19 outbreak. Only
a fraction of the global commercial jet fleet is flying and passengers passing through
TSA checkpoints at U.S. airports is down more than 90% year over year.
The outbreak has pummeled stocks. Boeing (BA) shares are down about 59% year to date, far worse than comparable double-digit drops of the
S&P 500 and
Dow Jones Industrial Average. Aerospace
supplier stocks Barron’stracks are down about 46% year to date. Shares in U.S. airlines are down about 57% year to date on average.
The fact that a legendary
value investor like Buffett doesn’t want to put new money to work in the sector surely isn’t great news, but that doesn’t mean the sector is
uninvestable. And there was a difference of opinion ever within Berkshire on view at Saturday’s meeting.
“The defense contract business remains very sound and strong within Precision Castparts,” said Berkshire Vice Chairman Greg Abel on Saturday. “Precision Castparts is, literally as we speak, continuing to adjust their business relative to the demand that would come out of Boeing.”
Precision Castparts is a highly engineered materials supplier Berkshire
bought in 2016for more than $35 billion, including net debt. Berkshire paid almost 20 times estimated earnings for the company.
Those valuation multiples are long gone. Precision peers
Howmet Aerospace (HWM) and
Allegheny Technologies(ATI) trade 12 and 10 times estimated 2021 earnings, respectively. Both multiples are a discount to Boeing, materials components in the
S&P 500 as well as their own histories. Howmet shares are down 49% year to date. Allegheny stock has fallen 65%.
Defense, as
an industry, is at least at large as commercial aerospace. Exact comparisons are different and required making assumptions about how far to look up and down the supply chain. Historically, defense sales have grown more slowly than commercial aerospace sales, but the business is stable and not tied to the state of the overall economy.
Lockheed Martin(LMT), for instance, generates more than 70% of sales from the U.S. Defense Department. The DoD buys products in good and bad economic times.
Defense, right now, is in far better shape than commercial aerospace and stocks reflect that fact. Large U.S. prime defense contractor stocks are down about 13% year to date and trade for 13 times estimated 2021 earnings.
Defense can be a lifeline for some aerospace stocks including Howmet and Allegheny. Wall Street isn’t ready to recommend either stock yet though, but there is a paradox investors should be aware of.
Less than half of the analysts covering the pair rate share buy, below the average buy-rating ratio for stocks in the Dow. But the average
analyst price target for Allegheny implies a gain of 90%. The average price target for Howmet implies a gain of 50%.
Analysts are demanding a lot of upside for all the commercial aerospace uncertainty. As uncertainty falls, those stocks can go higher.
As for Berkshire’s position in U.S. Airlines: The conglomerate held 9.2% of the stock outstanding in
Delta Air Lines (DAL) as well as 10.1% of
American Airlines(AAL), 7.6% of United Airlines (UAL) and 8.7% of
Southwest Airlines.Buffett said Saturday he sold all his airline stocks.
Howmet
recently separated from
Arconic(ARNC). Arconic was spun out of
Alcoa(AA) in 2016.
Write to Al Root at
allen.root@dowjones.com
https://www.barrons.com/articles/bo...e-hathaways-warren-buffett-to-buy-51588521087
