In a research note, reported on by CNBC and MarketWatch, analysts at the bank noted that Berkshire now has a thing for airline stocks, over a decade after Buffett dismissed them as “the worst sort” of businesses. Within the sector, Morgan Stanley identified Southwest Airlines as the best fit, adding that the Dallas, Texas-based low-cost carrier’s "consistent earnings power," strong balance sheet, good management, "simple" business model, low cost structure, “significant competitive advantage” and attractive price are exactly the type of characteristics that Berkshire usually looks for.
“Our screen for potential airline acquisitions by BRK suggests LUV would be a good strategic fit," Morgan Stanley analysts Kai Pan and Rajeev Lalwani said in the note. "We have no knowledge of any M&A discussions and the airlines have not commented. That said, our screen of potential airline acquisitions by Berkshire suggests Southwest could fit well into Berkshire's family given its acquisition criteria, ownership of capital-intensive businesses, and deployable $100b+ cash balance."
The analysts, who compared Southwest to Berkshire's insurance company GEICO, went on to speculate that Buffett’s firm could bid $70 to $80 per share for the airline, based on Berkshire’s tendency to pay historical market premiums for companies. Southwest’s stock closed up 1.26% at $58.82 on Tuesday following the publication of Morgan Stanley’s report.
Berkshire already owns a large stake of around $2.8 billion in Southwest, according to the latest March 13F filing holdings data provided by FactSet, noted CNBC. Buffett’s firm also holds positions in Delta Air Lines Inc. (DAL), American Airlines Group Inc. (AAL) and United Continental Holdings Inc. (UAL).
Morgan Stanley’s report surfaced as Berkshire comes under increasing pressure to put its excess cash to better use. Last month, the Omaha, Nebraska-based company’s stock rallied after it opened up the door to buybacks by changing its share repurchase policy. (See also: Berkshire Removes Cap on Share Buybacks, Stock Climbs.)
Both Berkshire and Southwest Airlines declined to comment on speculation that a takeover deal might happen. (See also: 6 Stocks Warren Buffett Might Buy Next.)