) recently completed its 41st consecutive year of profitability - a
stunning number for any airline.
And following better-than-expected Q4 results in January, analysts
revised their earnings estimates significantly higher for Southwest
for both 2014 and 2015. This sent the stock to a Zacks Rank #1
(Strong Buy). Estimates have continued to climb as the company
approaches its Q1 earnings release on April 24.
Southwest Airlines Co. is the nation's largest carrier in terms of
originating domestic passengers boarded. Including AirTran (which
it acquired in 2011), it operates the largest fleet of Boeing
aircraft in the world, serving 96 destinations in 41 states, the
District of Columbia, Puerto Rico, and five near-international
Fourth Quarter Results
Southwest delivered solid Q4 results on January 23. Adjusted
earnings per share reached a Q4 record of 33 cents, beating the
Zacks Consensus Estimate of 28 cents. This was significantly higher
than the 9 cents earned in the same quarter the year before.
Total operating revenues were also a fourth quarter record at $4.4
billion, increasing 6.1% year-over-year. Revenue passenger miles
(RPMs), which calculates the number of miles traveled by paying
passengers (# of paying passengers X distance traveled), rose 3.3%,
while average passenger fare increased 5.4% to $156.05.
Southwest also reported solid results on the cost side as it
"benefited from stable fuel prices, ongoing fleet modernization
efforts, and rigorous cost control efforts,"
according to CEO Gary Kelly. The cost per available seat mile (CASM
= operating costs / available seat miles), declined 3.1% to 12.68
For the full year, Southwest generated free cash flow of $1.0
billion. The company returned $611 million of that to shareholders
through stock buybacks and dividends. It also reduced debt and
capital lease obligations by $313 million.
Following strong Q4 results, analysts revised their estimates
significantly higher for both 2014 and 2015, sending the stock to a
Zacks Rank #1 (Strong Buy).
Estimates have continued to climb too as Southwest has reported
encouraging monthly traffic statistics. Year-to-date, RPMs are up
1.7% as the load factor (RPMs / ASMs) has increased 2.2 points to
You can see the strong, steady rise in estimates in the company's
"Price & Consensus" chart:
The current 2014 Zacks Consensus Estimate is $1.37, up from $1.24
ninety days ago. This represents 22% annual EPS growth. The 2015
consensus is now $1.62, up from $1.43 over the same period. This
corresponds with 18% annual EPS growth.
Southwest is scheduled to report its Q1 results on April 24.
Despite the soft overall market, shares of LUV have soared 25%
year-to-date. But the valuation picture still looks reasonable with
shares trading at 16.5x 12-month forward earnings. That is a slight
discount to its 10-year median of 16.9x. Its free cash flow yield
of 6.2% is also above its historical median of 5.9%.
The Bottom Line
With strong earnings momentum, stellar growth projections, a
history of profitability and reasonable valuation, shares of
Southwest Airlines offer attractive upside potential.
Todd Bunton, CFA is the Growth & Income Stock Strategist
and Editor of the
Income Plus Investor service
SOUTHWEST AIR (LUV): Free Stock Analysis Report
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