Southwest Airlines Stock: Buy The Dip As It Comes

by Trefis Team
+20.36%
Upside
47.63
Market
57.33
Trefis
LUV
Southwest Airlines
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Progress in mass vaccination and growing passenger numbers at TSA checkpoints have been a boon for the airline industry in recent months. However, newly recognized coronavirus variants of concern by the WHO and restricted international travel are still weighing on the tourism industry. The shares of Southwest Airlines (NYSE: LUV) have raced ahead to reach pre-Covid levels unlike its immediate competitors, United Airlines and Delta Air Lines. This can be largely attributed to the company’s significantly lower debt outstanding and higher operating margin. After two rounds of payroll support, the U.S. government initiated a third phase as huge salary costs can trigger involuntary furloughs. Notably, the PSP-3 requires airlines to suspend dividends and share repurchases until September 2022. Despite tepid air travel demand, which remains 50% below pre-Covid levels, and macroeconomic uncertainty triggered by new coronavirus variants, Trefis believes that LUV stock is a good value investment in the long term. We highlight the historical trends in the company’s revenues, margins, and valuation multiple in an interactive dashboard analysis, Southwest Airlines’ Valuation.

Government aid strengthened Southwest’s balance sheet strength in 2020

In 2020, Southwest Airlines reported $9 billion of total revenues and just $1 billion of operating cash outflow due to $3.4 billion of relief funds under the CARES Act. In Q1 2021, the company received $1.7 billion of relief funds under PSP-2 and therefore reported $645 million of operating cash. Thus, government aid has been a key factor offsetting salary-related expenses (salary and wages account for 40% of operating expenses). Per recent filings, the company had $10.7 billion of long-term debt and $14.4 billion of cash and short-term investments – highlighting efficient capital and operations management during the pandemic. Given the company’s superior margins in comparison with peers, we believe that the stock will recoup short-term dips due to market forces.

Lull in air travel business is likely to remain

The company expects its second-quarter revenues to observe a 40% contraction from pre-Covid levels (Q2 2019). Growth in passenger figures led to a guidance revision by all airline companies with an expectation of positive cash generation during the latter half of the year. However, the resurgence in coronavirus cases in various countries continues to impact international and business travel demand. Also, the third round of payroll support indicates that the lull in the air travel business is likely to remain this year. The company will receive an aggregate of $1.9 billion to support salaries and wages for the second and third quarters.

Is there a better investment over Southwest Airlines? Southwest Airlines Stock Comparison With Peers summarizes how LUV compares against peers on metrics that matter. You can find more such useful comparisons on Peer Comparisons.

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