The other airline-related news recently has been about how frustrated customers are getting with the airlines; more passengers are getting bumped off of flights, there seem to be new fees every few months, etc. Very little has been in the news lately about the best-performing airline in recent history, Southwest Airlines (NYSE: LUV). With the company set to report its first quarter results on April 25, I thought a little reminder about this great company was in order.
What Makes Southwest Unique?
Southwest offers mainly shorter flights that don’t require a connection, and about 71% of its passengers fly nonstop to their destinations. By generally avoiding the congested-hub setup that most other airlines embrace, Southwest has been able to keep turnaround times low, keep their planes in the air more, and keep their fares low due to lower expenses.
With one of the lowest cost structures in the industry, Southwest has been able to maintain an excellent balance sheet (especially for an airline), and the company actually has positive net cash (cash minus debt). The company has recently expanded its service through its acquisition of AirTran Airlines, and Southwest is currently in the process of integrating and re-branding AirTran’s operations as their own.
Valuation
At just 12.8 times forward earnings, I believe Southwest is still somewhat undervalued, even after the share price has risen over 50% since last year. Revenues continue to rise as AirTran is integrated, and travel demand is on an uptrend recently. Southwest is expected to earn $1.00 per share this year, and this is expected to rise by almost 14% annually going forward. As long as the company is on pace to meet expectations for this year when first quarter earnings are released, I’d say the current valuation is more than justified.
Alternatives
The obvious alternatives are to invest in another of the airlines (there are only a few majors), however it is my adamant opinion that Southwest is the best-run by far, and the most worth of long-term investment consideration. Just take a look at this chart of the net cash position of some of the major airlines:
For the purposes of this comparison, we’ll consider American and US Airways to be the same company since they soon will be. My general attitude toward this merger is to wait and see. First of all, AMR, the parent company of American Airlines, filed for Chapter 11 bankruptcy protection (that’s what the “Q” at the end of a ticker symbol means, by the way), and is hoping to emerge from bankruptcy later this year. Call me old-fashioned, but I generally don’t put money into companies in bankruptcy.
The best candidate out of the rest of the airlines is Delta (NYSE: DAL), which despite its high debt loads is doing a good job of growing revenues and earnings, and has taken measures to reduce its debt load, down over $3 billion in the past two years. Although I see Delta as a risky and volatile stock, at just 4.7 times forward earnings, it may be so cheap that it’s worth a look. Delta is projected to grow its earnings at an average of 7% annually going forward. If all goes well with Delta, shareholders could be handsomely rewarded; however that is a big “if.”
Conclusion
Not only is Southwest the best-run airline in the market today, it is also very attractively valued. As far as long-term investibility goes, Southwest is the only airline stock that I could own and still sleep well at night.
(Matthew Frankel - Motley Fool Blog Network)
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