Southwest Air (LUV) is the leading domestic airline with primarily short-haul, high-frequency routes with low fares. It consistently garners high marks for customer service and generates loyalty through its no-baggage fee policy. It also wins customer approval for its flexible cancellation policy. LUV acquired AirTran Airlines which operates international routes and has been integrating AirTran into the Southwest system. July 1 marked the first international flights to the Caribbean under the Southwest Air name. Southwest currently flies to 95 cities in the U.S. and expects to add 50 cities to its network through expansion into international flights.
This would result in an increase of 10 -15% in revenue. Gate expansion plans in Houston, Fort Lauderdale, Baltimore and other East Coast cities to Mexico and Latin America would also enable flights to Canada. This will put Southwest Air in direct competition with United Continental in markets where they previously had a virtual monopoly.
On Wednesday this past week LUV reported very positive June results which bodes well for their quarterly earnings due out on 7/25. Their load factor increased to 86.1% from 85%. Analysts now expect passenger revenue per seat mile to grow at 8%. Combined with more modest cost increases of 2-3% projected by management, profit margins should improve. In April Southwest reported record 1st quarter earnings, in spite of the harsh winter weather, beating analyst estimates by 2 cents per share. LUV has exceeded analyst estimates in 6 of the past 8 quarters.
Southwest Air is generating significant free cash flow; $712 million in the 1st quarter alone, which will enable it to pay down $500 million in debt in 2014, further improving an already strong balance sheet.
With analysts raising their estimates for both 2014 and 2015 Southwest is trading at a projected P/E ratio of under 18 times 2014 earnings and less than 15 times 2015 estimates. The stock is well positioned to make continued new highs with earnings expected to grow 38% in 2014 and 18% in 2015.
Southwest Air’s very bullish Chaikin Power Gauge rating is driven by very bullish price/volume activity as well as increasingly bullish analyst ratings and earnings estimate increases. LUV is in the strong Transportation group and has shown amazing earnings consistency for an airline stock. Financial metrics such as Return on Equity, Free Cash Flow and Price to Sales Ratio are also very positive.
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