Southwest Airlines (LUV) is an American passenger airline company that runs regional and nearby international routes. The firm is the world’s largest low-cost airline and holds approximately 730 Boeing 737 aircraft. I am bullish on the stock.
Earnings
Southwest beat its fourth-quarter revenue estimate by $60 million and its EPS by $0.07. Looking forward, the company expects a Q1 load factor of between 75% to 80%, and in addition, it also estimates operating revenue to be only down by 10% to 15% from pre-pandemic levels.
The company’s Executive Vice President and Incoming CEO had the following to say: “Despite our fourth-quarter profit, we had a challenging start to 2022 as we continue to recover from the pandemic. While we made significant progress in 2021, the Omicron variant has delayed the demand improvement we were previously expecting in early 2022.
“With COVID-19 cases trending downward, the worst appears to be behind us, and we are optimistic about current bookings and revenue trends for March 2022.”
Because the airliner runs a low-cost model, its earnings performance is generally bound to high-volume and stable inflation. None of those two factors have been possible in 2021, but with most U.S. states dropping pandemic mandates and the Federal Reserve set to hike interest rates, we’re likely to see better days ahead for Southwest.
Upbeat Airline Industry
The airline industry experienced its first merger in six years this month after Frontier Airlines agreed to acquire Spirit Airlines in a deal worth $2.9 billion; Airline stocks bounced higher shortly after the announcement.
Merger and acquisition deal flow is usually a sign of industry growth, meaning that deals of this magnitude signal intent and could bring investor traction to the airline industry.
Valuation and Momentum
LUV has picked up the pace from a cash flow perspective, and this is overlooked by market participants, with the stock trading at an 18.1% discount relative to its five-year price/cash-flow ratio. In addition, Southwest is also undervalued on a book value basis, with the stock’s price to book ratio trading at a 15.4% discount relative to its five-year average.
The airline stock has also gathered pace lately, exceeding its 50-and 100-day moving averages. The stock’s momentum will likely sustain itself as COVID-19 lockdowns continue to be eased and inflation finds calm.
Wall Street’s Take
Turning to Wall Street, Southwest has a Moderate Buy consensus rating, based on eight Buys, seven Holds, and one Sell assigned in the past year.
The average Southwest Airlines price target of $52.40 implies 13.9% upside potential.
Concluding Thoughts
LUV is about to find the leverage it needs to deploy its low-cost business model. The stock is significantly undervalued, in my opinion, and the firm’s cash flow growth is as robust as ever.
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