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Stock Spotlight

Southwest riding high

Recent Price
$58
Dividend
$0.40
Yield
0.7%
P/E Ratio
15
Shares (millions)
621
Long-Term Debt as % of Capital
25%
52-Week Price Range
$58.06 - $35.42



We can all recite the risks of investing in airline stocks — the volatile price of jet fuel, pricey labor contracts, higher borrowing costs as interest rates rise, and concerns that passengers might cut back on their travel if 2017 doesn't turn out as rosy as many expect.

While the danger signs seem fairly obvious, don't tell Southwest Airlines ($58; LUV) investors about them. Since the company delivered better-than-expected results for the December quarter on Jan. 26, the shares have jumped 7%.

Despite that rally, Southwest isn't exceptionally expensive. Southwest's history of profitability (44 straight years in the black) and reputation for steadiness in a highly cyclical industry justify a premium price. At 18 times trailing earnings, the stock trades 31% above the industry average — slightly below its average premium of 32% over the last five years. Southwest, which yields 0.7%, is a Focus List Buy and a Long-Term Buy.

Operational strength

In the December quarter, Southwest earned $0.75 per share excluding special items, down 17% but $0.05 above the consensus. Operating revenue rose 2% to $5.08 billion, also topping analyst targets.

Credit much of the outperformance to post-election travel demand strong enough to boost prices for flights purchased with minimal advance notice. Business travel was also unusually strong in December.

While Southwest's per-mile costs rose in the December quarter, mostly because of the fuel- and labor-cost inflation mentioned earlier, the company expects expense growth to moderate in the March quarter. In the wake of a 2.9% decline in unit revenue in the December quarter, Southwest projects unit revenue flat to down 1% in the March quarter.

Annualized over the last three years, Southwest's per-share earnings rose 59% and operating cash flow 17%. Even with advance bookings looking good so far this year, investors shouldn't expect a repeat of growth rates swollen by fuel-price savings. However, at the time Southwest announced December-quarter earnings, analysts projected roughly flat per-share profits in 2017 despite a 5% gain in revenue. We considered the target too low before the airline delivered expectation-topping results.

Labor cloud's silver lining

Last year, Southwest flew a record 124.8 billion revenue passenger miles, along the way improving on-time performance and baggage-delivery rates. On the negative side, salary expenses rose nearly 7%, while fuel prices rose about 1%, as a 19% gain in the fourth quarter erased modest savings in the first nine months of the year.

The higher labor costs aren't all bad news. Yes, wages rose, but in 2016 Southwest signed contracts with five unions, including fourth-quarter deals with pilots and flight attendants, which locks in Southwest's three largest unions until 2018 (flight attendants) and 2020 or later (pilots and ramp workers). Pilots' pay will rise 30% by 2020, but this contract and the others provide the company with stability and predictability.

You can obtain an annual report for Southwest Airlines Co. at 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
Dec '16
$0.75
vs.
$0.90
4%
$51.31
-
$36.91
14 - 10
Sep '16
0.93
vs.
0.94
0%
43.57
-
35.42
11 - 9
Jun '16
1.19
vs.
1.03
5%
48.00
-
36.48
12 - 9
Mar '16
0.88
vs.
0.66
9%
45.39
-
33.96
12 - 9

 
Year (Dec)
Sales (Bil.)
Per-Share Earnings*
Per-Share Dividend
52-Week Price Range
P/E Ratio Range
2016
$20.43
$3.75
$0.38
$51.31
-
$33.96
14 - 9
2015
19.65
3.52
0.29
51.34
-
31.36
15 - 9
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

 
Quadrix Scores†
Overall
Momentum
Value
Quality
Financial Strength
Earnings Estimates
Performance
99
71
84
99
71
95
88

* Earnings exclude special items.
NA Not Available.
† Quadrix® scores are percentile ranks, with 100 the best.
e Dividend and yield estimated.

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Stock Spotlight

Southwest riding high

Wednesday, February 22, 2017

We can all recite the risks of investing in airline stocks — the volatile price of jet fuel, pricey labor contracts, higher borrowing costs as interest rates rise, and concerns that passengers might cut back on their travel if...

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