Is Southwest Airlines Stock Still A Buy? (LUV) - Seeking Alpha (registration)

Summary

• Although LUV's stock has already surged 80% year-to-date, it still has room to move higher.


• LUV's PEG ratio is exceptionally low at 0.53, the seventh lowest among all S&P 500 stocks.


• Southwest Airlines has been able to show earnings per share surprise in each one of the last three-quarters, and the company demonstrated significant improvement in its profitability.

Southwest Airlines Co. (NYSE:LUV) stock has been doing extremely well in recent years. Since the start of the year, LUV's stock has surged 80.0%. Moreover, since the beginning of 2013, LUV's stock has gained an astounding 231.2%. Is a stock that has already risen by that amount still a buy? In my opinion, LUV's stock still has room to move higher. Southwest Airlines has compelling valuation metrics, and very strong earnings growth prospects; its Enterprise Value/EBITDA ratio is very low at 7.98. The company's PEG ratio is exceptionally low at 0.53, one of the lowest among all S&P 500 stocks. Southwest Airlines has been able to show earnings per share surprise in each one of the last three-quarters, and the company demonstrated significant improvement in its profitability. In addition, Southwest Airlines is generating strong cash flows and returns value to its shareholders through stock buybacks and dividend payments.

The Company

Southwest Airlines operates passenger airlines that provide scheduled air transportation services in the United States. Based on the U.S. Department of Transportation's most recent data, Southwest Airlines is the nation's largest carrier in terms of originating domestic passengers boarded. The company was founded in 1967 and is headquartered in Dallas, Texas.

Valuation Metrics

The table below presents the valuation metrics of LUV, the data were taken from Yahoo Finance and finviz.com.

LUV's valuation metrics are excellent; the forward P/E is at 1.18, the Enterprise Value/EBITDA ratio is very low at 7.98, and the average annual earnings growth estimates for the next 5 years is extremely high at 35.55%. Furthermore, the PEG ratio is exceptionally low at 0.53, the seventh lowest among all S&P 500 stocks. The PEG Ratio - price/earnings to growth ratio is a widely used indicator of a stock's potential value. It is favored by many investors over the P/E ratio because it also accounts for growth. A lower PEG means that the stock is more undervalued.

Latest Quarter Results

On July 24, Southwest Airlines reported its second-quarter 2014 financial results, which beat EPS expectations by $0.08 (12.90%) and beat estimates on revenues.

The company reported record quarterly net income, excluding special items, of $485 million, or $0.70 per diluted share, compared to second quarter 2013 net income, excluding special items, of $274 million, or $0.38 per diluted share. This exceeded the First Call consensus estimate of $0.61 per diluted share.

In the report, Gary C. Kelly, Chairman of the Board, President, and Chief Executive Officer, stated:

We are very pleased with our strong second quarter earnings performance. Net income, excluding special items, of $485 million, or $.70 per diluted share, represents our fifth consecutive quarter of record profits. The successful execution of our strategic initiatives continues to contribute significantly to these record profits. Second quarter 2014 total operating revenues reached an all-time quarterly high of $5.0 billion, benefiting from an 8.5 percent year-over-year increase in passenger revenues. Also, we were very pleased with our cost performance. Operating expenses benefited from our strategic initiatives, as well, and were comparable to second quarter last year.

Next Quarter Results

Southwest Airlines will report its third-quarter 2014 financial results on October 23. LUV is expected to post a profit of $0.51 a share, a 50% rise from the company's actual earnings for the same quarter a year ago.

Dividend and Share Repurchase

Southwest Airlines has been paying uninterrupted dividends since 1980. However, the forward annual dividend yield is pretty low at 0.71% and the payout ratio is only 11.5%. The annual rate of dividend growth over the past three years was very high at 93.3%, over the past five years was also very high at 48.5%, and over the past ten years was at 21.9%.

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Source: Charles Schwab

Since the dividend yield of 0.71% is not very attractive, and the payout ratio is extremely low, there is a good chance that the company will continue to raise its dividend payment.

According to the company, its balance sheet, liquidity, and cash flows remain strong. At the end of second quarter 2014, it had $4.0 billion in cash and short-term investments. For first half 2014, net cash provided by operations was $2.46 billion, and capital expenditures were $907 million, resulting in strong free cash flow of $1.55 billion.

Thus far this year, Southwest Airlines has returned $652 million to Shareholders through the payment of $97 million in dividends and the repurchase of $555 million in common stock.

Competitors and Group Comparison

A comparison of key fundamental data between Southwest Airlines and its competitors is shown in the table below.

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Southwest Airlines has the lowest debt-to-equity ratio among the stocks in the group, and its PEG ratio is much lower than that of DAL and JBLU. However, its P/E ratio is the highest.

Technical Analysis

The charts below give some technical analysis information.

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Chart: finviz.com

LUV stock price is 1.24% above its 20-day simple moving average, 9.33% above its 50-day simple moving average, and 34.35% above its 200-day simple moving average. That indicates a short term, mid term and a long-term uptrend.

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Chart: TradeStation Group, Inc.

The weekly MACD histogram, a particularly valuable indicator by technicians, is at 0.3675 and descending, which is a bearish signal (a rising MACD histogram and crossing the zero line from below is considered an extremely bullish signal). The RSI oscillator is at 79.19, which indicates overbought conditions.

Analyst Opinion

Many analysts are covering the stock, but their opinion is divided. Among the nineteen analysts, six rate it as a Strong Buy, five rate it as a Buy, six rate it as a Hold, and two analysts rate it as an Underperform.

TipRanks is a website that ranks experts (analysts and bloggers) according to their performance. According to TipRanks, among the analysts covering LUV stock there are seven analysts who have the four or five star rating, six of them recommend the stock, and one analyst rates it as a Hold.

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Source: TipRanks

Is Southwest Airlines' performance improving?

In order to give an answer to this question, I decided to compare Southwest Airlines' latest trailing 12 months' values of six relevant parameters to their previous trailing 12 months' values and to the five years' average values. The results are shown in the table below; the data were taken from Portfolio123.

All trailing 12-month values of the Margins parameters and the Return on Capital parameters were above the previous 12-month values, and above the five years' average.

In my opinion, these results demonstrate significant improvement in the profitability of the company.

Major Developments

Southwest Airlines is launching international flights. On September 12, the company announced that it has filed an application with the U.S. Department of Transportation to add its first destination in Central America with daily roundtrip service between Baltimore/Washington Thurgood Marshall International Airport and Juan Santamaria International Airport in San Jose, Costa Rica, beginning March 7, 2015.

According to the company, Costa Rica will be the sixth near-international country served by Southwest Airlines from its U.S. gateway cities and the first new destination in the carrier's network after the integration of wholly owned subsidiary AirTran Airways is completed by the end of this year. Service to Punta Cana, Dominican Republic, and Mexico City begins November 02, as Southwest converts existing AirTran service in those destinations. Southwest began service this summer to Aruba, The Bahamas, Jamaica, and both Cancun and San Jose del Cabo/Los Cabos, Mexico.

Southwest Airlines has shown significant earnings per share surprise in each one of the last three quarters, as shown in the table below.

Data: Yahoo Finance - Analyst Estimates

In my opinion, the fact that the company succeeds to beat analyst expectations quarter after quarter by a considerable margin demonstrates the strength of its business, and there is a good chance that Southwest Airlines will continue to surprise by reporting better than estimated results also in the future.

LUV's stock has been doing extremely well in recent years. Since the start of the year, LUV's stock has already gained 80.0%, while the S&P 500 index has risen 7.3%, and the Nasdaq Composite Index has increased 8.0%. Moreover, since the beginning of 2013, LUV's stock has gained an astounding 231.2%, while the S&P 500 index has increased 39.0%, and the Nasdaq Composite Index has risen 49.4%. Nevertheless, considering its compelling valuation metrics and its very strong earnings growth prospects, LUV's stock, in my opinion, still has room to run.

Conclusion

As the fourth-largest U.S. airline, Southwest Airlines will benefit from the growth of air travel demand over the next years on a recovering U.S. economy. In addition, the company will also benefit from soon-to-be-launched international flights. Southwest Airlines has compelling valuation metrics and very strong earnings growth prospects; its Enterprise Value/EBITDA ratio is very low at 7.98, and its PEG ratio is exceptionally low at 0.53. Southwest Airlines has been able to show earnings per share surprise in each one of the last three-quarters, and the company demonstrated significant improvement in its profitability. In addition, Southwest Airlines is generating strong cash flows and returns value to its shareholders through stock buybacks and dividend payments.

All these factors bring me to the conclusion that LUV stock still has room to move up.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. (More...)

Source: southwest - Google News http://ift.tt/1DVFNzr