Air Canada Should’ve Been Buffett’s #1 Pick – Not America’s “Big 4”

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Last summer on June 28th, I wrote to you and identified Air Canada (ACDVF) as a tremendously undervalued stock.

Since then the rest of the market has caught onto the Air Canada story as the share price has subsequently risen more than 50 percent.

I’m thrilled with how this has played out for us…

But I don’t think that the Air Canada story is done.

This stock is still BY FAR the best value in the airline sector, and today I want to crunch the numbers to show you why.

But first, a quick reminder why we were looking at airlines in the first place.

Warren Buffett is Incredibly Bullish on Airlines

Over the past several years, Warren Buffett has invested billions of dollars into the four main U.S. airline operators.

As of the last regulatory filing, Warren Buffett’s company Berkshire Hathaway owns the following:

  • 65.5 million shares of Delta Airlines (DAL) worth $3.3 billion
  • 54.8 million shares of Southwest Airlines (LUV) worth $2.5 billion
  • 21.9 million shares of United Continental (UAL) worth $1.8 billion
  • 43.7 million shares of American Airlines (AAL) worth $1.4 billion

Combined, that is a $9.0 billion investment which even for Warren Buffett is enough money to show he is extremely bullish on the sector.

The interesting thing about Buffett moving into airlines is that for decades he hated the sector as an investment class with a passion. He once even called the industry a “death trap” for investors.1

So what changed to make Buffett warm up to airlines?

The answer is competition. Or more accurately, the lack of competition.

Buffett started investing in airlines in 2016 after U.S. Airways merged with American Airlines. The consummation of that merger marked the end of a decade-long period of constant airline consolidation which changed the competitive landscape of the industry.

Instead of 20 plus airlines competing relentlessly for passengers, by 2016 the industry had been reduced to mainly the Big 4. Out went an era of discount pricing and relentless competition and in came an era of sensible pricing and widening profit margins.

This industry is now what is called an oligopoly, folks. And while it isn’t great for customers, it is fantastic for airline profits.

Mr. Buffett is Still Missing the Best Airline Bargain

When I wrote last June about airlines, I noted that Buffett should have been looking north of the border at Air Canada if he really wanted to own an airline with some upside.

Since then, I have not been proven wrong with Air Canada’s share price vastly outperforming all of Buffett’s four airline holdings.

Air Canada chart

My opinion is that today it still isn’t too late for Buffett to get invested in Air Canada. The stock still has plenty of room to run.

Buffett has invested in the four major U.S. airlines because the industry is now an oligopoly. In Canada there is even less competition with the market being essentially a duopoly consisting of just Air Canada (55 percent market share) and its main competitor WestJet (37 percent market share).

Further, Air Canada shares are still very inexpensively valued. Today, the major U.S. airlines still trade at twice the valuation that Air Canada trades at relative to EBITDA (earnings before interest, taxes, depreciation and amortization).

That means that relative to the U.S. carriers, Air Canada has both half the competition (only one main competitor) and half the valuation!

When it comes to those two factors, smaller is definitely better.

Additionally, I believe there is a significant catalyst coming that will continue to push Air Canada’s share price higher…

Air Canada’s Cash Flow is About to Soar

With the company now wrapping up a major period of capital investment in new planes, cash outflows are about to decrease significantly which means that the free cash flow the business generates is going to increase.

Capital Allocation Strategy

Source: Air Canada Corporate Presentation

Over the next three years, Air Canada’s management believes that the company will generate $4.0 to $4.5 billion in free cash flow. That is cash flow that is available after paying all of the bills and making all capital expenditures.

If the company were to use all of that free cash flow to repurchase shares, it could retire half of the shares Air Canada has outstanding in just three years.

That’s great news for the share price!

Bottom line: Warren Buffett is bullish on airlines for good reason — the profitability of the industry has seriously improved. However, the best way to play the action is north of the border — where Air Canada operates with less competition, a cheaper valuation, and with a cash flow catalyst just over the horizon.

Here’s to looking through the windshield,

Jody Chudley

Jody Chudley
Financial Analyst, The Daily Edge
EdgeFeedback@AgoraFinancial.com

1 Buffett Decries Airline Investing Even Though at Worst He Broke Even, Forbes

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Warren Buffett Bets Big as Canada Abandons Capitalism

This post Warren Buffett Bets Big as Canada Abandons Capitalism appeared first on Daily Reckoning.

In a shocking turn of events, the Canadian Province of Alberta abandoned free market capitalism in December of 2018.

This was a story we were on top of as events unfolded.

Following the lead of dictators and oppressive regimes around the world, Alberta announced the enactment of mandatory production cuts for large oil producers operating in the province.

Keep in mind that Alberta is the Canadian equivalent to Texas. Cowboy hats and pickup trucks are everywhere. And Albertans don’t like the government sticking its nose in their business.

The most conservative of all people can be found in the Alberta oil patch. These folks are true entrepreneurs and detest government intervention.

As you might expect, the response to these government mandated production cuts in the Alberta oil patch were overwhelmingly… positive.

Wait, what?

Desperate Times Call for Desperate Measures

Prior to the Alberta Government’s oil patch intervention, Canadian Heavy Oil was selling for $50 per barrel less than West Texas Intermediate, the benchmark American oil blend.

Canadian producers were getting not much more than $10 per barrel for their crude. The industry was losing billions and billions of dollars and the Alberta Government was too because of lower royalty fees that were assessed on production revenue.

The reason for the pricing difference was simple:

Alberta’s oil is landlocked. Being landlocked means that the province needs to ship its oil through pipelines that run through other provinces and American states.

As you are likely aware, these days getting major pipelines built has been virtually impossible. The political left and environmental groups keep putting up roadblock after roadblock.

With all pipelines out of Alberta already full and the resulting glut of oil only forecasted to get worse, prices in the region plummeted.

That’s when the Alberta Government took action to deal with the problem.

With the benefit of hindsight, it looks like a great decision.

Immediately after the production cuts were announced, Canadian Heavy Oil prices went on a tear, now having tripled since December.

It has truly been a spectacular reaction by the market.

suncor's dividend

As I said, we were on top of this story back in early December, the moment after the production cuts were announced. I pegged Alberta producer Canadian Natural Resources (CNQ) as a way to profit from the opportunity we saw in improving Canadian heavy oil pricing.

I still like Canadian Natural shares today.

Interestingly, it turns out that I wasn’t the only one who saw a rebound in Canadian oil pricing as an opportunity in December.

Last week a certain “Oracle of Omaha” revealed that he had opened up a big new position in another Alberta oil producer during the fourth quarter of 2018…

Warren Buffett Bought Suncor and You Can Too!

During the fourth quarter of 2018, Warren Buffett’s conglomerate Berkshire Hathaway purchased more than $300 million in shares of integrated Canadian oil producer Suncor Energy Inc. (SU).

You don’t have to look any further than the chart below to understand what the appeal of Suncor is for Buffett.

suncor's dividend

Today, an investor can lock in a 3.9 percent yield by buying shares of Suncor. That yield is nice, but think of what that yield might turn into five years from now.

That’s because Suncor does an incredible job of growing that dividend.

In 2002, Suncor’s quarterly dividend was $0.01 per share. Today that quarterly dividend is $0.316 per share — a 31.6 times increase!

Just from 2010 until now, Suncor’s dividend has quadrupled. And guess what folks… oil prices are lower today than they were in 2010!

That kind of dividend growth with oil prices falling is amazing and speaks to the quality of Suncor’s assets.

This company is a cash flowing monster. Exactly the kind of free cash flow machine that Warren Buffett loves to own.

The big reason Suncor is able to return so much money to investors lies in the fact that Suncor’s existing base of oil reserves is already large enough to last for the next 36 years. That means that this company already has all of the oil it needs so it doesn’t need spend money and resources on finding more.

Complimenting Suncor’s massive reserve base is the fact that the company’s production has a miniscule decline rate of just 1 percent per year.1 That means that not only does the company not need to spend money finding oil, it also doesn’t need to spend much money offsetting year on year production declines.

For context, consider that a typical shale oil producer battles annual decline rates of more than 30 percent. That means that a shale producer must drill enough wells to replace 30 percent of production every year just to keep production flat!

These are expenses that Suncor — with its 1 percent decline rate — doesn’t have. So instead of spending that cash, Suncor can return that cash to shareholders.

With a rapidly growing 3.9% dividend yield, a 36-year reserve life and a 1 percent production decline rate, I believe Suncor is perfect addition to any diversified portfolio.

Just like Mr. Buffett!

Here’s to looking through the windshield,

Jody Chudley

Jody Chudley
Financial Analyst, The Daily Edge
EdgeFeedback@AgoraFinancial.com

1 Suncor Energy Inc. Investor Relations

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Here’s Why ‘A’ Students Work for ‘C’ Students

This post Here’s Why ‘A’ Students Work for ‘C’ Students appeared first on Daily Reckoning.

John Bogle, an entrepreneur, true capitalist and the founder of one of the world’s largest mutual fund companies, wrote in his book The Battle for the Soul of Capitalism concerns about the retirement system as a whole.

We’re in a crisis. But luckily, there’s a solution for those smart enough to listen.

He takes aim at CEOs of investment firms and believes retirement is going to be the next big financial crisis in this country. That’s a big deal, especially with so many people relying on distant retirement accounts to provide for their future security.

Bogle, an insider in the mutual fund industry, is disturbed by the greed he sees in his industry.

He says, “When I came into this business there were relatively small, privately held companies, and these companies were run
by investment professionals. Today, that has changed in every single respect. These are giant companies. They are not privately held anymore. They are owned by giant financial conglomerates, whether it’s Deutsche Bank, Marsh & McLennan, or Sun Life of Canada. Basically, the largest portion of mutual fund assets are run by financial conglomerates, and they are in the business to earn a return on their capital in the business—and not a return on your capital.”

Bogle points out that in mutual funds, you, as the investor, put up 100% of the money and take 100% of the risk. The mutual fund company puts up no money, takes no risk, and yet keeps 80% of the returns.

The investor gets back 20% of the gains (if there are even gains).

Warren Buffett Agrees

Warren Buffett is regarded as one of the greatest investors of our time. He is a capitalist. He is an entrepreneur. He is not a managerial capitalist. (Managerial capitalists are not entrepreneurs. They did not start the business. They do not own the business. As managerial capitalists, they have responsibilities, but take no personal financial risks).

This is what Warren Buffett has to say about these corporate money managers, managerial capitalists, most of whom are “A” students from great schools. He says, “Full-time professionals in other fields, let’s say dentists, bring a lot to the layman. But in the aggregate, people get nothing for their money from professional money managers.”

If this is true, it might be stated another way: Those who choose not to become financially educated or play an active role in their investments and, instead, turn their money over to professional money managers, are abdicating responsibility for their financial future—and, if Buffett is on target, getting little value for it. How great is the risk of turning your money over to a “professional” who brings little value to the undertaking of making your money work for you?

The Future of Education

Since the beginning of time, all a child had to do was focus on two types of education. They were:

  1. Academic Education: This education supports the general skills of learning how to read, write, and solve math problems. This is an extremely important education.
  2. Professional Education: This education provides more specialized skills to earn a living. The top students, the “A” students, become doctors, accountants, engineers, lawyers, or business executives. Other schools at this level are trade schools for students who want to become mechanics, construction workers, cooks, nurses, secretaries, and computer programmers.

What was missing?

Financial Education.

This is the level of education not found in our school system. This is the education of the future. Again, we advise kids to go to school to get a job and work for money, yet we teach them little or nothing about money.

The statistics tell a sad and sobering story: While 90 percent of students want to learn more about money, 80 percent of teachers do not feel comfortable teaching the subject. Someday, financial education will be part of the curriculum of all schools, but not in the near future.

Bureaucrats: “B” Students

The vast majority of students who graduate from our schools are “B” students. They’re taught, by and large, by “A” students, some of the brightest students who continue their education to become teachers. What becomes of those “B” students as they choose their path in life? It’s my opinion that they become bureaucrats.

My poor dad did well in school as an “A” student. He did well as a bureaucrat in the government.

Unfortunately, when it came to money, business, and investing, he missed out on the opportunity to gain real world knowledge. He could not survive in the cutthroat world of the big business and investment, while the “C” students and dropouts Steve Jobs, Bill Gates, Mark Zuckerberg, and hundreds of others find and develop their genius as true capitalists.

My rich dad was a dropout. He had to leave school to help run his family business. While he didn’t get a degree, he did get an education—running a business in the real world.

Using his education in the real world, my rich dad built a huge real estate empire and hired many “A” students to run his company. He did not need to be a valedictorian to be successful in the real world.

Rich Dad said, “The problem with the world is that it’s now run by bureaucrats.” He defined a bureaucrat as those in a position of authority—such as a CEO, president, sales manager, or government official—but who take no personal financial risks. Explaining further, he said, “A bureaucrat can lose a lot of money, but they do not lose any of their own money. They get paid, whether they do a good job or not.”

Rich dad said, “A true capitalist, an entrepreneur, knows how to take a dollar and turn it into a hundred dollars. Give a bureaucrat a dollar, and they’ll spend a hundred.”

And we wonder why we have a global financial crisis.

Become a “C” Student

Today, millions of people are relying on “B” students, bureaucrats taught by “A” students, from their financial well-being. The problem is that they don’t have your well-being in mind. They have theirs.

The message is simple: Success in the classroom does not ensure success in the real world. The world of the future belongs to those who can embrace change, see the future and anticipate its needs, and respond to new opportunities and challenges with creativity and agility and passion.

If you want to be rich and successful, traditional education, while helpful, is not enough. You need a strong financial education too; it’s an investment that pays dividends year after year.

How do you combat this? By becoming a “C” student—a capitalist.

Whether by investing or starting a business, you have to take control of your money and your retirement, not trust it in the hands of those who don’t have your best interests in mind.

Today, I encourage you to start learning how to make your own money work for you—not others.

Regards,

Robert Kiyosaki

Robert Kiyosaki
Editor, Rich Dad Poor Dad Daily

The post Here’s Why ‘A’ Students Work for ‘C’ Students appeared first on Daily Reckoning.

How Warren Buffett Wins From Bank of America’s Capital Plan

By Jordan Wathen March 19, 2015 Warren Buffett has a sizable stake in Bank of America (NYSE: BAC  ) , even if it’s hidden from plain view. Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) owns warrants that entitle it to purchase 700 million Bank of America shares for $7.14 each at any time before 2021. At the current price, it’s as if Berkshire has an $11.2 billion stake in Bank of America, making it one of Buffett’s largest investments. Owning warrants is not exactly like owning stock, however. Because Buffett hasn’t exercised his right to buy the shares, Berkshire Hathaway isn’t entitled to any dividends Bank of America pays on its common stock. In fact, every time Bank of America pays its quarterly dividend of $0.05 per share, Buffett gives up a little bit of a return. Berkshire Hathaway is missing out on $140 million in annual dividends by holding on to the warrants. Buffett contends this is a good … Continue reading