Analysts' Choice: Southwest Flies Disciplined Course

11/2/2015


  Recent Price
$45
  Dividend
$0.30
  Yield
0.7%
  P/E Ratio
14
  Shares (millions)
663
  Long-Term Debt As % Of Capital
25%
  52-Week Price Range
$47.17 - $31.36

The airline industry as a whole is adding seats. The six largest publicly traded U.S. airlines averaged 5.5% growth in capacity in the nine months ended September, with passenger traffic up an average of 5.6%, barely keeping pace. Yet Southwest Airlines ($45; LUV) has managed to be among the more aggressive expanders (capacity up 6.9% this year) while making unusually efficient use of those new seats (traffic up 8.0%).

Helped by an all-time high of 85.4% in the September quarter, Southwest's load factor (percentage of available seat miles filled by revenue passengers) rose to 83.5% in the first nine months of 2015, up from 82.6% in the same period a year earlier. None of the other five airlines managed such a large improvement in this key efficiency factor, and two saw their load factors fall. Southwest is a Buy and a Long-Term Buy.

Operational excellence

In the September quarter, Southwest earned $0.94 per share excluding special items, up 71% and $0.02 above the consensus. Revenue grew 11%, or 7% excluding an accounting change. Operating profit margins reached 20.3%, up 680 basis points from the year-earlier period.

Passenger revenue per available seat mile fell 4% in the quarter. However, strong bookings and revenue trends in October have Southwest expecting revenue to rise 1% on a per-unit basis in the December quarter.

Southwest's economic fuel costs fell to $2.20 per gallon in the September quarter, down 25% from a year earlier. The company estimates per-gallon costs of $2.05 to $2.10 in the fourth quarter, which should help keep profit margins rising, as they have in each of the last nine quarters.

In the first nine months of this year, Southwest grew sales 6% and per-share profits 85%. The consensus projects sales and profit growth of 9% and 53%, respectively, in the December quarter, followed by 6% and 13% growth in 2016.

Soaring above the rest

Over the years, airlines have acquired a well-deserved reputation as boom-or-bust stocks, in part because they indulge in binges of expansion, then spend years sleeping off the hangover. That seems less likely this time around, at least for now. American Airlines ($46; AAL), Delta Air Lines ($50; DAL), and United Continental ($60; UAL) — which combine to account for about two-thirds of total capacity for U.S. airlines and have been adding seats at a slower rate than Southwest — have all announced plans to decelerate their capacity growth. Southwest targets 7% growth this year and 5% to 6% in 2016.

Southwest, known for its dominant position at Dallas' Love Field airport, in mid-October opened a $156 million international terminal in Houston, with flights to Mexico, Aruba, Jamaica, Costa Rica, the Bahamas, and Belize. Southwest now flies to 96 cities.

At 14 times trailing earnings, Southwest trades 26% below its five-year average P/E ratio and 22% above the average airline in the S&P 1500 Index — well below its five-year average premium of 41%. Obtain an annual report for Southwest Airlines Co., P.O. Box 36611, Dallas, TX 75235, (214) 792-4000, www.southwest.com.

SOUTHWEST AIRLINES
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Sep '15
0.94
vs.
0.55
7%
40.87
-
31.36
14 - 11
Jun '15
1.03
vs.
0.70
2%
44.19
-
33.02
18 - 13
Mar '14
0.66
vs.
0.18
6%
47.17
-
38.26
23 - 19
Dec '14
0.59
vs.
0.33
5%
43.19
-
28.40
25 - 16
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2014
18.61
2.01
0.20
43.19
-
18.78
21 - 9
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
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
99
86
74
98
65
96
72

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


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