Is There A Better Pick Over Southwest Airlines Stock Ahead Of Earnings?

by Trefis Team
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The shares of JetBlue Airways (NASDAQ: JBLU) currently trade 30% lower than pre-Covid levels as compared to a 13% decline in Southwest Airlines stock (NYSE: LUV). JetBlue incurred just $683 million of operating cash burn last year which is much lower than the $2 billion drop in market capitalization since February 2020. Also, the third phase of the payroll support program restricts airline companies from returning capital to investors as dividends and share repurchases until September 2022. Therefore, considering JetBlue’s consistent revenue growth before the pandemic, comparable profitability to Southwest Airlines, and strong balance sheet, Trefis believes that the stock is a good value investment. We compare the historical trends in revenues, margins, and valuation multiple of both companies in an interactive dashboard analysis, Southwest Airlines vs JetBlue Airways: Industry Peers; Which Stock Is A Better Bet?– parts of which are highlighted below.

1. Revenue Growth

JetBlue’s growth has been a bit higher than Southwest Airlines before the pandemic, with JetBlue’s revenues expanding at an average rate of 7% from $6.6 billion in 2016 to $8 billion in 2019, versus Southwest’s revenues which grew at an annual rate of 3.4% from $20.2 billion in 2016 to $22.4 billion in 2019. With the pandemic bringing the travel & tourism industry to a grinding halt, both companies reported a 60% (y-o-y) top-line contraction in 2020.

  • To trim the demand-supply gap, JetBlue and Southwest lowered capacity (available seat miles) by 48% and 34%, respectively, last year.
  • Thus, lower cash generation from reduced capacity and occupancy rate prompted the need for government grants to support employee expenses and maintenance costs.
  • In 2020, JetBlue Airways and Southwest Airlines reported $3 billion and $9 billion of total revenues, respectively.
  • Both companies reported strong revenue growth in recent quarters, assisted by domestic travel demand and a decline in new infections. (related: United Airlines’ Aircraft Order To Assist Long-Term Revenue Growth)

2. Returns (Profits)

Southwest’s operating profit margin is slightly better than JetBlue Airways. By negating the impact of non-cash charges, the operating cash flow margin is almost similar at 18%.

  • In 2020, Southwest Airlines reported $9 billion in revenues, $3 billion of net loss – at a net margin of -45.6%. Similarly, JetBlue reported $3 billion in revenues, $1.3 billion of net loss, and a net margin of -58%.
  • Despite operating a fleet of 718 aircraft, Southwest’s cash burn from operations was just $1 billion in 2020 compared to $683 million of JetBlue, which operates a fleet of 267 aircraft. (related: Pick Southwest Airlines Stock To Fly?)

3. Risk

Both companies have sizably low long-term debt obligations primarily due to the government’s assistance during the pandemic and consistent growth in air travel demand. Per recent filings, JetBlue reported $3.7 billion of cash & investments against total debt of $4.4 billion. Moreover, Southwest’s cash & cash equivalents stand taller than its long-term debt obligations.

  • Higher financial leverage coupled with continued revenue growth is a boon for generating surplus equity returns. However, slow growth and a loaded balance sheet negatively affect shareholder returns during recessionary periods.
  • Interestingly, dividends and share repurchases stand suspended until September 2022 as per a clause under the CARES Act. Thus, profiting from short-term dips remains a key strategy for airline stocks.
  • Given Southwest and JetBlue’s strong balance sheet, we believe both stocks have low downside risk from short-term demand shocks. (related: Are Long-Term Trends In Favor Of Boeing Stock?)

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since 2016.

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