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Southwest Is Waiting for the Pandemic to Be Over

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Southwest Airlines (NYSE:LUV) stock appears to have settled into a trading range as investors wait for the pandemic to be over.

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The company is burning between $20 million and $25 million of cash each day, with revenue down 70% to 75%. Capacity is down 40% to 50%.

Somehow investors see this as good news. The stock opened for trade July 14 at about $33, little changed from where it was three months ago.

The assumption is that the pandemic will end one day. The assumption is we’ll go back to flying one day. The assumption is that Southwest can get through that, with cash to last two years. The assumption is that on the other side of the pandemic, Southwest will be the strongest carrier.

LUV Stock Is the Best of a Bad Bunch

The assumption is that when things return to normal, Southwest stock will return to its previous level near $60, and your overall return will be sweet.

Southwest says 14% of its employees have opted for voluntary leave and long-term separation. The company announced its plan to buy out employees in early June. 

The assumption of strength has been in Southwest stock since the pandemic started. The shares are down 38% on the year so far, but big rivals Delta Air Lines (NYSE:DAL), United Airlines (NASDAQ:UAL) and American Airlines (NASDAQ:AAL) are all down by an average of 60%.

Since the lockdowns hit in March stock in the four main airlines have been moving in lockstep. But Southwest is riding higher. The stock’s price advantage grew with industry optimism in late May. The pack seemed to catch up in June. But since things have slid back down in July Southwest’s relative strength has grown again.

Pounding the Table

This is because analysts are pounding the table for Southwest.

Goldman Sachs (NYSE:GS) upgraded Southwest to a buy in late June.  Analyst Catherine O’Brien made the typical arguments. Southwest’s flights are short and demand for them will come back before international travel. It has a strong balance sheet. She put a $47 one-year price target on the shares. Trefis has put on a price target of $44, using much the same reasoning. 

The fact that so many Southwest employees took the buy-out means labor costs should look better this fall, because furloughs will hit lower-seniority employees first. Labor is the biggest cost for the airlines, and the most variable. When fuel costs are high, they can be as little as 22% of the total. When they’re low they can be as much as 30% of the total.

All this makes Southwest the most undervalued airline, despite its relative strength, according to The Value Team. Present estimates are that traffic will still be down 40% in late autumn, returning to previous levels in 2021.  In this analysis the past is prologue. Southwest had the best free cash flow in the industry before the pandemic and should have it after.

The Bottom Line

The consensus among analysts is that your patience with Southwest stock will be rewarded.

Southwest is keeping middle seats open but says its revenue decline isn’t as bad as it once feared. The company is trying to goose demand for the fall with a one-way fares as low as $39. 

Everything depends on the path of the pandemic, however. Right now, that path looks very grim. Personally, I can’t imagine getting on a plane until vaccines are freely available, about one year from now. Only now are people starting to realize how bad the novel coronavirus is for younger people.

If Americans get smart and knock this thing down, LUV stock will recover. So long as many of us remain stupid, that won’t happen. This makes it hard for me to invest in any U.S. carrier right now, even the strongest one. There are a lot of stupid Americans.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear,  available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story. 

The post Southwest Is Waiting for the Pandemic to Be Over appeared first on InvestorPlace.

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

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