Warren Buffett loves cheap airline stocks, which could get a boost from Trump

Airlines already have low valuations, so if tax rates fall, they could be even more attractive


President Donald Trump’s corporate tax plan could increase the profitability of airlines, which would enrich Warren Buffett and other airline investors.

The decision by Warren Buffett’s Berkshire Hathaway to load up on Apple shares is making big news. But the billionaire investor also put money in four airline stocks.

A tailwind for airlines is that their high income tax rates might fall dramatically if President Donald Trump succeeds in cutting corporate tax rates.

In the fourth quarter, Berkshire Hathaway Inc. BRK.B, -0.05%  built a new stake of 43.2 million shares in Southwest Airlines Co. LUV, +3.58% while also adding to its holdings of American Airlines Group Inc. AAL, +2.08% Delta Air Lines Inc.DAL, +2.63%  and United Continental Holdings Inc. UAL, +2.73% Most airlines are expected by analysts to post declining profits in 2017 as fuel prices rise. Industry profits are expected to be healthy in 2018, with those four airlines expected to generate double-digit increases in earnings per share.

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Tax rates

FactSet estimates that the average effective income tax rate over the past 12 reported months for S&P 500 SPX, +0.50%   member companies was 26.4%. The highest U.S. corporate tax rate is 35%, and, of course, many companies pay state and local income taxes as well. It is reasonable to argue that a reduction in the federal corporate tax rate will help some companies more than others, and airlines might be among the biggest beneficiaries.

 

A Harvard Business professor explains Donald Trump

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Harvard Business School Professor Clayton Christensen developed the famous "jobs to be done" theory to explain consumer behavior. He talked to MarketWatch about how his jobs-to-be-done theory can also explain Donald Trump's rise to power.

We decided to broaden our review by looking at the nine airlines included in the S&P 1500 Composite Index, which is made up of the S&P 500, the S&P 400 Mid-Cap Index MID, +0.29%  and the S&P Small-Cap 600 Index SML, +0.55%

Here they are, in alphabetical order, with their effective income tax rates:

Airline	Ticker	Effective income tax rate - 2016*
Alaska Air Group Inc.	ALK, +0.69%	39.48%
Allegiant Travel Co.	ALGT, +0.00%	36.53%
American Airlines Group Inc.	AAL, +2.08%	37.75%
Delta Air Lines Inc.	DAL, +2.63%	34.10%
Hawaiian Holdings Inc.	HA, +0.10%	37.95%
JetBlue Airways Corp.	JBLU, +0.45%	37.58%
SkyWest Inc.	SKYW, +3.57%	39.37%
Southwest Airlines Co.	LUV, +3.58%	36.74%
United Continental Holdings Inc.	UAL, +2.73%	40.74%
Source: FactSet

(For SkyWest Inc. SKYW, +3.57% we are showing the effective income tax rate for 2015, because the company posted an operating loss for 2016.)

Trump has pledged to lower the corporate tax rate to 15%. He said Feb. 9 that his administration would be “announcing something I would say over the next two or three weeks” on corporate taxes that “will be phenomenal” for businesses.

Valuation

The S&P 1500 trades for 16.2 times consensus 2018 earnings estimates, according to FactSet, while the industrial sector of the index (which includes the airlines) trades for 16.8 times consensus 2018 estimates. Here’s how the airlines stack up, by this measure, and how much analysts expect their earnings to grow in 2018:

Airline	Ticker	Consensus EPS estimate - 2017	Consensus EPS estimate - 2018	Expected EPS growth - 2018	Closing price - Feb. 14	Price/ consensus 2018 EPS estimate
Alaska Air Group Inc.	ALK,+0.69%	$7.89	$8.61	9%	$96.30	11.2
Allegiant Travel Co.	ALGT,+0.00%	$10.96	$12.49	14%	$174.85	14.0
American Airlines Group Inc.	AAL,+2.08%	$4.61	$5.35	16%	$46.57	8.7
Delta Air Lines Inc.	DAL,+2.63%	$5.23	$5.79	11%	$49.86	8.6
Hawaiian Holdings Inc.	HA,+0.10%	$4.83	$5.02	4%	$51.10	10.2
JetBlue Airways Corp.	JBLU,+0.45%	$1.82	$2.01	10%	$19.66	9.8
SkyWest Inc.	SKYW,+3.57%	$3.09	$3.47	12%	$35.05	10.1
Southwest Airlines Co.	LUV,+3.58%	$3.89	$4.68	20%	$55.31	11.8
United Continental Holdings Inc.	UAL,+2.73%	$6.77	$8.11	20%	$73.74	9.1
Source: FactSet

It appears from these low forward price-to-earnings ratios that many investors still don’t trust airlines, but the industry has been stable in recent years, as it has found new ways to make money and avoid cutthroat price competition, following decades of mergers, bankruptcies and other disruptions.

Erick Ormsby, the founder of Alcosta Capital Management, particularly favors Southwest Airlines because of the prospect that its high tax rate will fall, as well as 20% expected EPS increase in 2018 and its overall growth trajectory.

“You have a stable environment, relatively speaking, for an airline that is trading at 12 times earnings,” he said in an interview Feb. 14.

By Philip Van Doorn

Source: http://www.marketwatch.com/story/warren-buffett-loves-cheap-airline-stocks-which-could-get-a-boost-from-trump-2017-02-15

Labor Day Stocks To Buy

Ahhhh, Labor Day. That bittersweet holiday where you gather with friends, fire up the Weber, crack open a few cold ones and ease off into the weekend. It's a great time to celebrate the last great weekend of the summer. But for guys like me who crave those summer nights, it's a rough reminder that the warmest days are behind us and the fall is coming. For Chicago Bears fans like me, that means four months of frustration and misery.

The market isn't exactly rallying into the close of summer either. Major market indexes have been under pressure for the last two weeks. Late into the trading day Friday, the Dow was off 2%, while the S&P 500 flirted with the support at 1,915. It's becoming more and more difficult to find winning stock ideas. But don't despair, the Zacks Rank is here to help you uncover winning stocks in any market. In the spirit of Labor Day, let's play Peter Lynch and find some stocks that we know.

Heineken NV (OTCQX:HEINY)

I see what you're drinking there. Feeling like an aristocrat going with the import beer. Look at you with your fancy pants on. Heineken N.V. is engaged in producing and distributing beverages. It offers beer, cider, soft drinks, and other beverages. The company's principal global brand is Heineken. Heineken N.V. is headquartered in Amsterdam, the Netherlands.

Shares of HEINY had been bouncing around in a consolidation range between March and July. A great earnings report in August led to a breakout to new 52-week highs above $42.50. But the market took all that back and pushed shares into the middle of the range below $40. Looks like short-term support sits at $38, about a dollar above the previous bottom.

Hormel Foods (NYSE:HRL)

If you're going to be drinking beer, you should probably have something to eat too. Build yourself up a nice base. Perhaps some Lloyds Barbecue Ribs? Look no further than this food brand, Hormel. Hormel Foods Corporation is a multinational manufacturer and marketer of consumer-branded meat and food products, many of which are among the best known and trusted in the food industry. Products manufactured by the corporation include hams, bacon, sausages, franks, canned luncheon meats, stews, chilies, hash, meat spreads, shelf-stable microwaveable entrees, salsas and frozen processed foods.

Hormel's shares have held up very well amidst the market selloff. Their price dipped from a 52-week high at $64 to $59 and found plenty of support. Shares have always remained above the 50-day moving average and still show a strong bullish trend. Slow and steady wins the race here.

Home Depot (NYSE:HD)

If you're like me, you're not just going to sit around and drink beer this weekend. You're going to drink beer and do some projects. What's more American than building a tree house while guzzling a six pack? Before you crack open that first beer, make sure you've got your materials ready. Home Depot is here to help. Home Depot is one of the world's largest home improvement retailers. The company offers a level of service unprecedented among warehouse-style retailers. Home Depot stores cater to do-it-yourselfers, as well as home improvement, construction and building maintenance professionals.

Home Depot's shares experienced wild volatility along with the market gyrations. The range in that volatile week went from $124 down to $92. Since then shares have rebounded a bit, bouncing around $115 the last few days.