Southwest Airlines Stock, Time To Buy?
As European nations mull tighter restrictions to contain the spread of the Omicron variant, experts anticipate a similar trend in the U.S. and across the world in the coming months. As investors speculate a slower recovery timeline for the travel industry, the shares of Southwest Airlines (NYSE: LUV) have lost a quarter of their value since November. However, the passenger numbers at TSA checkpoints are just 15% below pre-pandemic levels – indicating strong air travel demand despite heightened fears and tougher Covid norms. Notably, LUV stock has lost $11 billion in market capitalization since February 2020 despite burning just $1.1 billion of operating cash over the period. Also, the domestic business contributes almost 97% of Southwest’s revenues and is likely to support earnings amid international travel blockades. Considering the negative impact of the Omicron variant for a quarter, Trefis believes that there is a sizable upside in Southwest Airlines stock. We highlight the historical trends in revenues, earnings, and stock price in an interactive dashboard analysis on Southwest Airlines Valuation. (related: Optimism In Estee Lauder Stock A Trigger For Delta Air Lines?)
How did Southwest Airlines perform in the third quarter?
In Q3 2021, Southwest Airlines reported just 17% contraction in operating revenues and a 1.6% reduction in capacity (available seat miles) over Q3 2019 – highlighting the strong uptick in passenger demand. The company earned $446 million of net income and burned $575 million of operating cash. As working capital changes had a negative impact on operating cash during the quarter, the cash on hand assisted $135 million of capital expenses and certain debt retirements. On the operational side, occupancy rate was 80.7%, almost reaching pre-Covid levels propelled by domestic demand and efficient capacity utilization.
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A quick look at Southwest’s historical performance
Southwest Airlines’ Revenues grew by 13% from $19.8 billion in 2015 to $22.4 billion in 2019, driven by a slow growth in domestic air travel. The company’s net margins have remained relatively flat within the 10-12% range, but EPS increased by 30% from $3.30 in 2015 to $4.28 in 2019 due to lower shares outstanding. In 2020, the company’s top line observed a 60% (y-o-y) contraction as air traffic demand plummeted, resulting in capacity curtailment and cost control measures. (related: Are Long-Term Trends In Favor Of Boeing Stock?)
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| Returns | Dec 2021 MTD [1] |
2021 YTD [1] |
2017-21 Total [2] |
| LUV Return | -15% | -16% | -21% |
| S&P 500 Return | -3% | 21% | 104% |
| Trefis MS Portfolio Return | -1% | 42% | 283% |
[1] Month-to-date and year-to-date as of 12/21/2021
[2] Cumulative total returns since 2017
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