$LUV Stock Update

LUV chart 7-7-15


  • LUV down 19% over last quarter
  • Rest of airline industry also down
  • Despite a lot of recent company and industry turmoil, fundamentals look strong
  • I recommend we HOLD


  • Analyst recommendation 2.1
  • PEG 0.61
  • EPS next 5Y 26%
  • Performance     month: -10%, quarter -19%, 6 month -19%, year 24%




  • Goldman Sachs ranks LUV #1 of 10 Stocks With the Most Upside Potential
    • Rating and Target Price: Buy, $58
      Upside to Target: 75.3%
    • TheStreet Ratings: Buy, A-
      TheStreet Ratings Said: “We rate Southwest Airlines (LUV) a buy. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company’s strengths can be seen in multiple areas, such as its revenue growth, impressive record of earnings per share growth, solid stock price performance, largely solid financial position with reasonable debt levels by most measures and notable return on equity. We feel its strengths outweigh the fact that the company shows low profit margins.”
  • DOJ civil antitrust investigation of airline industry
    • The U.S. government is investigating possible collusion among major airlines to limit available seats, which keeps airfares high, according to a document obtained by The Associated Press.
    • The civil antitrust investigation by the Justice Department appears to focus on whether airlines illegally signaled to each other how quickly they would add new flights, routes and extra seats.
  • Rapid expansion concerns
    • This year could lead to even higher profits thanks to a massive drop in the price airlines pay for jet fuel, their single highest expense. In April, U.S. airlines paid $1.94 a gallon, down 34 percent from the year before.
    • And that’s what worries Wall Street analysts and investors.
    • Historically, cheap fuel has led airlines to make money-losing decisions. They would rapidly expand, launching new routes and setting unrealistically low airfares to lure passengers. Airlines that already flew those routes would match the fare, and all carriers would lose money.
    • Such price wars are long gone, but today’s low fuel costs along with recent comments from airline executives have given the market jitters.
    • Airline stocks plunged in May after the chief financial officer of Southwest said at an industry event that the carrier would increase passenger-carrying capacity by 7percent to 8 percent, an increase over an earlier target.
  • LUV’s revenue growth has slightly outpaced the industry average of 3.1%. Since the same quarter one year prior, revenues slightly increased by 6.0%. Growth in the company’s revenue appears to have helped boost the earnings per share.
  • Southwest Airlines reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, Southwest Airlines increased its bottom line by earning $1.65 versus $1.06 in the prior year. This year, the market expects an improvement in earnings ($3.32 versus $1.65).
  • Looking at where the stock is today compared to one year ago, we find that it is not only higher, but it has also clearly outperformed the rise in the S&P 500 over the same period. Although other factors naturally played a role, the company’s strong earnings growth was key. The stock’s price rise over the last year has driven it to a level which is somewhat expensive compared to the rest of its industry. We feel, however, that other strengths this company displays justify these higher price levels.
  • Net operating cash flow has increased to $1,452.00 million or 29.75% when compared to the same quarter last year. Despite an increase in cash flow, Southwest Airlines’ cash flow growth rate is still lower than the industry average growth rate of 73.50%.
  • The current debt-to-equity ratio, 0.39, is low and is below the industry average, implying that there has been successful management of debt levels. Despite the fact that LUV’s debt-to-equity ratio is low, the quick ratio, which is currently 0.57, displays a potential problem in covering short-term cash needs.


  • Tentative new contract for flight attendants:
  • Late last week, the executive board who represent Southwest flight attendants approved a tentative new contract, which over the next several weeks will be presented to the full membership to ratify.

If approved, Southwest flight attendants would continue to be the highest paid in the (airline) industry through 2019.


  • LUV CEO Comments:
    • Our full year 2015 available seat mile capacity falls in the 7 to 8 percent range.”
    • “For 2016, we expect the incremental growth from that carryover to be modest, which is what we communicated in our earnings call.”
    • “In total, our 2016 ASM are estimated to increase in the 6 to 7 percent range year over year.”
    • “Based on bookings and revenue trends thus far, we expect second quarter PRASM (passenger revenue per seat mile) to decline 3 percent year-over-year, with the most difficult comparisons coming here in May.”
    • “Quick note on oil prices: Of course those continue to fluctuate, but they have remained on an upward trajectory since our last update.”
    • This year is a unique story, which actually carries over to next year…it’s really that carryover into next year. If you’re thinking about longer-term, I do think this is a peak [in terms of growth] year, and we would expect that to really glide down in line with what everyone else is thinking.”
  • The company, which reiterated its 2015 fleet and capacity plans, is also leaving no stone unturned to modernize its fleet, and expects to have 715 aircraft in its fleet by 2016 end, which represents a 2% increase from the estimated figure of 700 by 2015-end. Southwest Airlines’ aircraft capital commitments are $1.1 billion and $1.3–$1.4 billion for 2015 and 2016, respectively. Capacity for 2016 is projected to grow in the band of 6% to 7% on a year-over-year basis.
  • Also, in a bid to expand its operations, Southwest Airlines intends to extend its services from Houston’s Hobby Airport to eight international locations by 2015-end. Southwest Airlines also plans to operate a daily flight between Denver and Puerto Vallarta starting Nov 1, 2015 (read more: Southwest Airlines to Connect More International Locations).
  • Shares of major U.S. airlines fell as much as 10 percent Wednesday as investors worried that the carriers might add too many flights and cannibalize their profit margins.
  • Airlines have earned record profits partly by limiting capacity, which props up fares, and by adding new fees and raising the price of old ones. Investors fear that the airlines are losing that discipline and adding too many seats for the traveling public to fill at current fares — that could lead to lower prices and thinner profit margins.


  • Giving back
    • Southwest Airlines’ board of directors authorized a new $1.5 billion buyback program. The company also raised its quarterly dividend to 7.5 cents per share (30 cents per share annualized), representing an increase of 25% over the previous payout of 6 cents.

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