Thursday, June 13, 2013

Southwest Airlines stock - To buy or not to buy?

With shares of Southwest Airlines (NYSE:LUV) trading at around $13.85, is LUV an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:
 
C = Catalyst for the Stock’s Movement
 
Southwest has enjoyed strong upward momentum over the past six months. Analysts also like the stock: 6 Buy, 7 Hold, 1 Underperform, 1 Sell. The analyst mean target for Southwest is $15.42. These aren’t the only positives.
 
According to Glassdoor.com, employees have rated their employer a 4.1 of 5, and 87 percent of employees would recommend the company to a friend. Therefore, the company culture is strong. Leadership is even more impressive as 90 percent of employees approve of CEO Gary C. Kelly.
 
Southwest recently hiked its quarterly dividend by 400 percent and boosted its stock repurchase program to $1.5 billion from $1 billion. At the same time, cost savings have been good.
 
Yet another positive is that online traffic has slightly improved. According to Alexa.com, Southwest.com currently ranks at No. 807 on a Global scale, and at No. 162 in the United States.
 
Over the past three months, page views-per-user has increased 0.6 percent to 6.32, time-on-site has increased 2 percent to 6:45, and the bounce rate (only one page view per visit) has declined 8 percent to 12.3 percent. These are all positive signs.
 
On the negative side, there are many arguments that Southwest is too customer friendly. In other words, Southwest doesn’t charge enough fees. This keeps customers happy, but it has the potential to lead to frustrated investors.
 
As far as valuation is concerned, Southwest is starting to get expensive. Its currently trading at 27 times earnings while only sporting a profit margin of 2.22 percent. Comparatively, Delta Air Lines (NYSE:DAL) is trading at 17 times earnings and has a profit margin of 2.43 percent. JetBlue Airways (NASDAQ:JBLU) is trading at 18 times earnings and has a profit margin of 2.21 percent.
 
This makes Delta the most appealing of the three from a fundamental standpoint. But what about dividends?
 
Southwest currently yields 1.20 percent whereas Delta yields 1.30 percent and JetBlue doesn’t offer any yield. Delta wins again. As far as stock performance is concerned, all three are up year-to-date, but Delta has been the most impressive. The chart on the next page will provide further details.
Let’s take a look at some important numbers prior to forming an opinion on this stock.
 
T = Technicals Are Mixed
 
Southwest hasn’t performed well over the past month, but the trend is still to the upside.
 
1 MonthYear-To-Date1 Year3 Year
LUV-1.98%35.65%54.85%15.83%
DAL-0.33%52.23%79.98%34.35%
JBLU-6.07%10.84%25.05%-2.46%
 
At $13.85, Southwest is trading below its 50-day SMA, but still above its 200-day SMA.
 
50-Day SMA13.98
200-Day SMA12.14
 
E = Equity to Debt Ratio Is Strong
 
The debt-to-equity ratio for Southwest is stronger than the industry average of 2.00.
 
Debt-To-EquityCashLong-Term Debt
LUV0.443.14B3.04B
DALN/A3.60B12.99B
JBLU1.49849.00M2.83B

E = Earnings Have Been Steady

Earnings have fluctuated on an annual basis, but they have been impressive, especially for an airline considering the industry’s history. Revenue has consistently improved over the past three years.

Fiscal Year20082009201020112012
Revenue ($) in millions11,02310,35012,10415,65817,088
Diluted EPS ($)0.240.130.610.230.56

Looking at the last quarter on a year-over-year basis, revenue increased 2.30 percent, but earnings declined 39.80 percent.

QuarterMar. 31, 2012Jun. 30, 2012Sep. 30, 2012Dec. 31, 2012Mar. 31, 2013
Revenue ($) in millions3,9914,6164,3094,1734,084
Diluted EPS ($)0.130.300.020.110.08

Conclusion

Southwest still has strong upward momentum. Delta offers a better valuation, a higher yield, and the stock has been outperforming Southwest over the past year. That said, with a weak consumer not seeming to gain much strength, fewer fees might be appealing at Southwest.

For the moment, Southwest is still an OUTPERFORM.

(Dan Moskowitz - The Wall Street Cheat Sheet)

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