Earnings Scorecard: LUV - Analyst Blog

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The largest U.S. low-cost carrier Southwest Airlines Co. ( LUV ) saw the thirty ninth year of profit in fiscal 2011, as announced on January 19, amid rising fuel prices and economic uncertainties.

Fourth Quarter & Fiscal 2011 Review

Southwest Airlines reported fourth quarter adjusted earnings of 9 cents per share beating the Zacks Consensus Estimate by a couple of cents. The quarter's earnings, however, dropped 40% from the year-ago quarter. For fiscal 2011, adjusted earnings declined 41.9% year over year.

Total revenue improved substantially both in the fourth quarter and fiscal 2011. Continued growth in the All-New Rapid Rewards program, EarlyBird check-in, unaccompanied minor travel and pet fees led to the healthy performance. Airlines traffic showed an impressive growth with strong increases in capacity.

Escalating fuel prices took operating expenses higher for the last year. Unit cost (cost per available seat mile) excluding fuel and special items, dipped slightly in the fourth quarter while remained stable for the full year.

(Read our full coverage on this earnings report: Southwest Beats on Strong Top Line )

Guidance

For the first quarter of 2012, management expects passenger revenue to continue to improve and unit costs to increase compared to the year-ago quarter. Fuel costs, including fuel taxes are estimated at approximately $3.35 per gallon.

Further, Southwest expects to exit fiscal 2012 with a fleet of 691 aircraft and projects capital expenditure of $1.3 billion.

Agreement of Analysts

Following the fourth quarter earnings release, the analysts are skewed toward the negative side in estimate revisions for the upcoming quarter. Out of 10 analysts, 3 revised their estimates downward over the last 30 days while none made a positive revision. None of the analysts moved in either direction over the last 7 days.

The movements of estimates for the next two fiscal years were on the positive side. For fiscal 2012, 5 analysts out of 14 made upward revisions over the last 30 days while 3 moved downward. Only 1 analyst out of 8 raised the estimate over the last 30 days for fiscal 2013 while none moved in the opposite direction.

None of the analysts moved in either direction over the last 7 days for the two fiscal years.

Although Southwest is poised to benefit from fleet rightsizing, Evolve retrofit program, steady capacity growth and several ancillary revenues, the analysts are mainly concerned with high maintenance and operating costs associated with fleet rightsizing and modernization.

The company is introducing new The Boeing Co. ( BA ) 737-800 fleet into its network, upgrading old Boeing 737-700 fleet with the Boeing Sky Interior, renovating in-flight cabins and redesigning interiors through a program called Evolve: the New Southwest Experience. The overall fleet modernization plans is expected to boost the company'spre-tax income by about $70 million in 2012, $300 million in 2013 and $500 million in 2014.

The shift to new jetliners will add at least $6-$7 million to operating income this year, thereby lowering maintenance costs. Further, the Evolve retrofit program and new Boeing 737-800 planes have revenue potential of roughly $200 million and $100 million, respectively, for this year.

Nevertheless, revamping of in-flight cabins and interiors are expected to increase maintenance expenses by $40 million this year and $20 million in the next. In addition, replacement of old planes with new ones would raise depreciation expenses by $50 million this year.

While the AirTran acquisition is providingsubstantial opportunities for future revenue growth, it is expected to result in a one-time charge of $500 million, of which $134 million was expended last year. Moreover, coupled with surging fuel prices, Southwest also expects non-fuel costs to grow modestly this year primarily due to higher salaries, wages and benefits, maintenance and airport costs.

The analysts have turned positive based on Southwest's profitable actions to endure surging fuel prices and the ongoing market turmoil. The company is successfully passing on the increased cost to customers in the form of fare hikes. Additionally, hedging strategies provide a cushion to the rising fuel prices and are being used extensively by Southwest Airlines.

The analysts expect Southwest to report strong revenue and earnings growth this fiscal year on the back of new reservation system, Rapid Rewards frequent flyer program  and increased ancillary product offerings such as EarlyBird check-in, unaccompanied minor travel and pet fees.

The company is adding improved features to its services as well as introducing new products, which is enhancing its value and profitability. Furthermore, Southwest's strong balance sheet with manageable debt maturities added to the analysts' optimism for making upward revisions to the stock.

Magnitude - Consensus Estimate Trend

The Zacks Consensus Estimate for the first quarterremained static at 5 cents over the last 7 days but fell by 2 cents over the last 30 days.

Over the last 7 and 30 days, the magnitude of the fiscal 2012 and 2013 estimate revisions remained unchanged at 80 cents and $1.00, respectively.

Earnings Surprises

With respect to earnings surprises, the company's fairly good track record is expected to continue in the coming quarters. Southwest Airlines produced a positive average earnings surprise of 5.13% over the last four quarters, indicating that it outpaced the Zacks Consensus Estimate by that amount over the last year.

Neutral Recommendation

We believe Southwest Airlines is well positioned for growth owing to its cost leadership position, strong balance sheet, low cost, flexibility, network optimization, fleet modernization and increasing revenue initiatives. However, rising fuel prices, new advertising rules, stiff competition from United Continental Holdings Inc. ( UAL ) and Delta Air Lines Inc. ( DAL ), increased expenses and higher technology investments keep us on the sidelines.

We are currently maintaining our long-term Neutral recommendation on Southwest with a target price of $10.00. The stock retains a Zacks #3 (Hold) Rank for the short term (1-3 months).

About Earnings Estimate Scorecard

Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These "Earnings Estimate Scorecard" articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at: http://www.zacks.com/education/


 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: BA , DAL , LUV , UAL

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