tiprankstipranks
Southwest Airlines Stock: Is the Post-Pandemic Surge Worth Buying?
Stock Analysis & Ideas

Southwest Airlines Stock: Is the Post-Pandemic Surge Worth Buying?

Story Highlights

LUV is expected to have a positive year as COVID-19 cases decline sharply and the government reduces COVID-related restrictions on airlines. In addition, Southwest’s high liquidity gives it an edge over competitors, as the company is in a better position to meet its debt obligations.

Southwest Airlines (LUV), the largest domestic carrier in the country, closed at $36.99 in today’s trading session, closing down almost 2%. However, most airline stocks have experienced a surge in their prices in the past week, as the airline sector gets relaxed, which was otherwise affected since COVID-19 started.

LUV is currently enjoying the high air travel demand and strong liquidity, which points to a strong future outlook. Factors such as a high earnings-per-share growth rate, northward estimate revisions, and high demand for air travel raise optimism about the stock and make it a potentially attractive investment. We are bullish on LUV stock.

Southwest’s Earnings Could be a Surprise for Investors

The airline industry has suffered due to the pandemic-led headwinds. However, this year has proved beneficial for airline companies due to the robust demand for air travel. In March, Southwest and other airlines requested President Joe Biden to ease the testing requirements and masking formalities for international travelers. The request has been partially approved, which could result in a boost in demand for travel.

This implies that the company’s future potential is great, but what about the present? Earlier in April, Southwest highlighted its second-quarter guidance and indicated that the company aims to increase revenue by enhancing the passenger seating (load factor) to about 85%. The company also expects to pay off $20 million in debt by the end of Q2.

Luckily, Southwest had a profitable last quarter of 2021 compared to other airlines, and overall profitability has been improving. The company reported positive EPS in Q4 2021 for the first time since COVID-19 began. LUV enjoyed net profits of more than $85 million, which led to EPS standing at $0.11 ($0.14 when excluding special items).

Fast forward to the first quarter of 2022, the company’s CEO, Bob Jordan, said, “With COVID cases declining, the worst tends to be behind us.” This level of optimism acts as a ray of hope for investors of LUV.

The company’s earnings per share are expected to rise to $2.67 this year and could potentially grow to $3.84 per share in 2023. LUV’s earnings per share are projected to grow aggressively, with the pandemic in the rear-view mirror.

Furthermore, looking at the company’s sales to total assets, Southwest is more efficient than other companies in the industry, as it has a sales to total assets ratio of 0.5 compared to the industry average of almost 0.44.

Moreover, Southwest is attractive from a sales perspective as well. Southwest’s sales are predicted to increase by more than 54% for Fiscal 2022.

Travel Recovery and Southwest’s High Liquidity Complement Each Other

Southwest Airlines is known for yielding a surprising earnings history. The company’s earnings outperformed the Zacks Consensus estimates for three out of the past four quarters.

Moreover, the high demand for air travel bodes incredibly well for the future. As a result, Southwest Airlines is hopeful that it will reap profits in three quarters of the year and for 2022 overall. Moreover, based on management’s predictions, the company’s Q2 revenue will increase by 8-12% compared to 2019.

The good news about the company is that it is highly liquid, so insolvency is the least of investor concerns. At the end of the first quarter, Southwest’s cash and cash equivalents equaled $15.7 billion, which is above its debt of $10.7 billion.

Currently, the company has a high amount of cash, and there’s high growth potential given the high demand for travel. So, if the air travel market recovers, the repressed demand might prove beneficial for the company and help it do more than just return to profitability in 2022.

Wall Street’s Take

Turning to Wall Street, LUV stock maintains a Moderate Buy consensus rating. Out of 14 total analyst ratings, eight Buys, five Holds, and one Sell ratings were assigned over the past three months.

The average LUV stock price target is $53.79, implying 45.4% upside potential. Analyst price targets range from a low of $34 per share to a high of $72 per share.

Takeaway – Is LUV Stock Attractive?

Airline stocks have been punished since the COVID-19 pandemic spread throughout the world in 2020. However, these stocks are receiving a nice bounce as COVID-19 cases decline at a sharp rate. The company has experienced a rise in demand for both domestic and international flights, which is an encouraging long-term sign.

In addition, Southwest depicts a brighter future, as it expects profitability in 2022. Analysts are also hopeful that Southwest is ready for takeoff. It is expected to earn revenue of more than $24 billion and generate healthy profits. This means LUV has a lot in store for its investors, making it an exciting stock to consider.

Disclosure

Trending

Name
Price
Price Change
S&P 500
Dow Jones
Nasdaq 100
Bitcoin

Popular Articles