Why Southwest Airlines Stock Remains A Favorable Bet

+61.58%
Upside
36.51
Market
58.99
Trefis
LUV: Southwest Airlines logo
LUV
Southwest Airlines

The shares of Southwest Airlines (NYSE: LUV) are again observing a downtrend due to rising benchmark prices and macroeconomic uncertainty triggered by the Russia-Ukraine war. The stock has lost $7.5 billion in market capitalization since February 2020 despite multiple rounds of payroll support assistance provided by the U.S. government. Amid growing fears of slow economic growth due to rising commodity prices, Southwest Airlines is expected to benefit from fuel hedges in the near-term. Notably, the company has a hedge position on almost 60% of the targeted fuel consumption for 2022. Per analyst presentation, Southwest is slated to observe $0.78 of hedging gain per gallon at Brent price of $120. Our interactive dashboard on Southwest’s valuation highlights the historical trends in revenues, earnings, valuation multiple, and forecast for FY2022.

Before the pandemic, Southwest’s revenues observed an average growth rate of 3.4% p.a. from $20 billion in 2016 to $22 billion in 2019. The company primarily earns its revenues from the sale of air tickets and other ancillary services such as freight & mail. Top line expansion has been assisted by continued capacity growth and rising ticket prices. Historically, the company’s net margins have remained relatively flat within the 10-12% range, but EPS increased by 23% from $3.48 in 2016 to $4.28 in 2019 due to regular share buybacks.

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Passenger and Air Cargo Demand Remains Strong

In recent months, investors have been optimistic on Atlas Air stock (NASDAQ: AAWW), a global provider of leased aircraft and aviation operating services. Atlas Air stock has more than doubled from pre-pandemic levels as the air freight market observed a surge in demand. Atlas Air provides air cargo services whereas Southwest caters to domestic passenger demand. Moreover, Southwest’s domestic business contributes around 95% of total revenues. Passenger numbers at TSA checkpoints breached the 2 million mark in mid-February despite the broader concerns of rising inflation and supply chain disruptions. (related: Southwest Airlines Stock Poised For Strong Gains?)

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

 Returns Mar 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
 LUV Return -3% -1% -15%
 S&P 500 Return 2% -6% 100%
 Trefis MS Portfolio Return 1% -9% 257%

[1] Month-to-date and year-to-date as of 3/3/2022
[2] Cumulative total returns since the end of 2016

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