Let’s admit it: Nobody likes airline stocks, even consumer favorite Southwest Airlines (NYSE:LUV). The industry is highly regulated, and the impact of creeping crude oil prices on jet fuel costs and other issues make this industry a difficult one to succeed in. The fact that American Airlines parent AMR Corp. (PINK:AAMRQ) just declared Chapter 11 bankruptcy — the latest in a long line of traditional “hub-and-spoke” carriers that went belly-up in the last decade — is all the proof you need.
But don’t count out Southwest. It regularly ranks well above its peers in customer satisfaction and, more importantly, profitability.
Consider, though, that fiscal 2009 earnings were just 13 cents a share on $10.3 billion in revenue — and fiscal 2011 earnings were 23 cents a share on $15.6 billion in revenue. Looking ahead, 2012 earnings could tally over 67 cents a share on $17.5 billion in revenue!
A significant quarterly loss in its fiscal third quarter really weighed on Southwest. The result was a harsh sell-off of around 35% that sent LUV stock to the $8 range in late 2011 — levels not seen since late 2009. The stock hasn’t recovered since.
Of course, you have to bank on fuel prices not getting significantly higher or consumer spending getting considerably weaker over the next several months. But hey, nobody said buying a bottom was easy.
On Jan. 25, I wrote a column for MarketWatch declaring that Corning (NYSE:GLW) was a great bargain after a post-earnings selloff. If you bought on that dip, you would have seen about 15% profits in two months.
Of course, that was before the recent trouble. Corning has slid about 6% in just a matter of weeks. But after further analysis, I remain convinced that Corning remains a great investment.
Yes, price declines for LCD displays caused a significant drop in 2011 profits and ate into Corning’s 2012 outlook. Also, Corning previously warned that its fiscal first-quarter earnings could fall anywhere from 5% to 20% based on low prices and weaker demand. That could be a real pain for shareholders if the worst-case scenario plays out.
However, long-term investors should look past this recent trouble and to the future. Corning has a revamped Gorilla Glass 2.0 just unveiled at the Consumer Electronics Show early this year, and the booming tablet and smartphone market means there’s a good chance sales will pick back up for GLW.
Its LCD panel business, while weak, also is a good long-term play and represents 40% of 2011 sales. Let’s not be naïve and think that the world will revert to those old tube-based TVs and computer monitors anytime soon, even if consumer spending isn’t all its cracked up to be.
Another high-tech angle is Corning’s fiber optic cable business for telecom use, representing more than 25% of 2011 sales.
And if you calculate valuation based on full-year 2012 earnings of $1.60, you get an attractive P/E of less than 9 at current pricing. This is after revenue has increased 23% from fiscal 2009 to 2010, then another 19% from 2010 to 2011. Profits admittedly have not kept pace, but the top line is there.
Worst-case scenario: Shares drift sideways and deliver a 2.2% dividend yield. But Corning is hardly a dog with fleas with no upside potential. All it needs is a little more consumer spending or a few juicy supplier contracts to turn things around.
Jeff Reeves is the editor of InvestorPlace.com, and author of “The Frugal Investor’s Guide to Buying Great Stocks.” Write him at firstname.lastname@example.org, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. As of this writing, he did not own a position in any of the aforementioned stocks.