Summary
- Southwest, Delta, American Airlines and United Continental Holdings have all increased in price.
- The operational performance for Southwest has been the best, but Delta is close.
- American Airlines and United Continental Holdings have had to choose between sales growth and positive operating margins.
Over the past two years, the airline industry has been a great place for investors. Several companies have delivered monstrous returns and Southwest Airlines Co. (NYSE:LUV) is one of those. To provide a little more insight into the company's performance, I will be breaking out a DuPont Analysis and comparing some of the metrics across a few of the major players in the industry. The returns for a few of the airline companies, including Delta (NYSE:DAL), American Airlines (NASDAQ:AAL), and United Continental Holdings (NYSE:UAL), are shown in the graph below.
(click to enlarge)
So what caused the market to have so much faith in Southwest? The company quadrupled their net income from fiscal 2011 to fiscal 2013, more than doubled their operating income, and raised their operating margins from 3.23% to 7.44%. Table 1 will help me explain it.
(click to enlarge)
Tax Burden
The tax burden represents the portion of "Earnings before Taxes" that the company gets to keep. The company's effective tax rate has decreased over the last 2 years but is still extremely high.
Interest Burden
The interest burden functions the same way as the tax burden, it represents how much the company keeps. The dramatic increase in the percentages represents southwest losing a much smaller percentage of their EBIT to paying interest expenses.
Operating Margins
The improvement in operating margins is very appealing. Given the broad increase in prices, it would be natural to think that the operating margin improvements were consistent across the industry. However, the steady growth in operating margins was the story for Southwest and Delta, not for every airline. The following charts break down the operating margins for 2011, 2012, and 2013 across these four major players.
As you can see from the charts, the margins for American Airlines and United Continental Holdings actually dropped from 2011 to 2012 before bouncing back in 2013. Throughout that period, the only company to post negative operating margins was AAL, and they were fairly consistent. They had negative margins in every single year. Despite that, if you recall the stock chart from the start of the article, it is UAL that has struggled to keep pace with the rest of the pack.
Asset Turnover
The asset turnover has not been bad for Southwest, but it was not a source of relative strength until 2013. From 2012 to 2013, the asset turnover dropped from .92 to .91, but that is a much smaller drop than DAL or AAL reported. The charts below show the asset turnover for each company in each fiscal year.
The company with the huge drop off in asset turnover was AAL between 2012 and 2013. However, AAL actually grew their sales quite a bit. The asset turnover ratio got killed by a huge increase in assets. Don't read too much into their huge drop off though because it may be reflecting a change in accounting policies.
AAL has actually been fairly solid at growing their gross sales. The growth rate in sales was second only to Southwest.
Leverage Ratio
In the DuPont Analysis near the start of the article, it appeared that the company had a fairly steady leverage ratio. In this case, that was the result of using the book values rather than the market values. If the market values of equity and liabilities are used to establish the leverage the result is quite different. As you will see in Table 2, the leverage ratio for Southwest changed in 2013 as a result of a dramatic increase in the market cap of the stock.
Conclusion
All of the airlines mentioned have done reasonably well over the last few years in terms of stock price, but the operating metrics for the companies have shown some significant variation. For Southwest and Delta the story seemed fairly similar, but AAL and UAL were quite different. For AAL it was rapid growth in sales at the cost of running negative operating margins. For UAL it was weak growth in sales but positive operating margins. Southwest's strength across every metric does come at a price though. The chart below shows the EV/EBITDA ratios for each company as reported by Yahoo.
I think Southwest is the best company in the batch, but I'm not convinced it is the best value. Delta has outperformed the other 3 in share price over the last two years and yet it still has the lowest EV/EBITDA ratio by a good margin.
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...)
Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from either Yahoo Finance or the SEC database. If either of these sources contained faulty information, it could be incorporated in our analysis. The analyst holds a diversified portfolio including mutual funds or index funds, which may include a small long exposure to the stock.
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Source: southwest - Google News http://ift.tt/1x9WbYr
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