Southwest Shares Poised To Climb

11/3/2014


  Recent Price
$34
  Dividend
$0.24
  Yield
0.7%
  P/E Ratio
19
  Shares (millions)
691
  Long-Term Debt as % of Capital
22%
  52-Week Price Range
$35.49 - $16.92

The U.S. airline industry lost more than $50 billion from 2001 to 2012. Today, the skies look much brighter.

Seats are full, fuel prices low, and airfares rising. Equally important, U.S. airline executives have shown restraint, entering 2013 with lower capacity than prerecession levels.

These tailwinds contributed to Southwest Airlines' ($34; LUV) robust September-quarter results. Earnings per share soared 62% to $0.55 excluding special items, easing past the consensus by $0.02. Operating revenue advanced 6% to $4.80 billion.

Traffic rose 6%, while the average fare increased 1%. Operating profit margin rose more than four percentage points to 18%, the highest level for any September quarter since 2005. Cash from operations slumped 44% for the quarter but rose 23% over the last four quarters combined. With a Quadrix Overall score and both sector-specific ranks exceeding 97, Southwest Airlines is a Long-Term Buy.

Efficiency advantage

Southwest is known for a low cost structure centered on using secondary, less-trafficked airports. In the past, management has claimed the company enjoys a 36% cost advantage to traditional hub-and-spoke carriers. By acquiring AirTran for $3.2 billion in 2011, Southwest moved into more expensive and congested airports.

To its credit, Southwest continues to scrap underperforming routes. One measure of efficiency, passenger revenue per available seat miles, rose 6% in the first nine months of the year and is projected to rise 2% in October. The airline's 12-month return on equity has risen in five straight quarters to 15.8%, its highest level since the period ended September 2001.

With fuel accounting for 35% of operating expenses in 2013, Southwest benefits from slumping oil prices. In the September quarter, fuel costs slipped 4% to $2.94 per gallon. Southwest says fuel prices linger near their lowest point in four years and expects per-gallon costs of $2.70 to $2.75 in the December quarter.

About 99% of Southwest's capacity is in the U.S., sheltering its operations from the overseas arms race to expand capacity, particularly by Middle Eastern carriers. Only in July did Southwest launch international flights to the Caribbean and Mexico — routes previously flown by AirTran.

Management describes the travel environment as healthy and has yet to see any effects from the Ebola outbreak. Look for more on the 2015 outlook at investor day, set for Nov. 10.

Conclusion

Southwest shares have returned 101% in the past year, well ahead of the industry average of 42%. Yet the company's trailing P/E ratio of 19 remains 16% below its five-year average and roughly in line with its peers.

Profit estimates for both the December and March quarters have steadily risen over the past 90 days. For the 12 months ending September 2015, earnings per share are projected to surge 36% to $2.40. If Southwest meets the current consensus and its P/E ratio holds at 19, the shares will rally 36% over the next 12 months.

An annual report for Southwest Airlines Co. can be obtained at P.O. Box 36611, Dallas, TX 75235; (214) 792-4000; www.southwest.investorroom.com.

SOUTHWEST AIRLINES
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Sep '14
0.55
vs.
0.34
6%
32.43
-
25.47
21 - 16
Jun '14
0.70
vs.
0.38
8%
26.64
-
21.82
22 - 18
Mar '14
0.18
vs.
0.07
2%
22.63
-
17.73
20 - 16
Dec '13
0.33
vs.
0.09
6%
18.98
-
12.73
22 - 14
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2013
17.70
1.12
0.10
19.00
-
10.36
17 - 9
2012
17.09
0.56
0.03
10.61
-
7.76
19 - 14
2011
15.66
0.43
0.02
13.59
-
7.15
32 - 17
2010
12.10
0.74
0.02
14.32
-
10.42
19 - 14
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
99
98
66
96
71
99
97

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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