Can Southwest Airlines Keep Soaring, Or Will LUV Stock Crash?

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Southwest Airlines Co (LUV) is (pardon the pun) one of the highest fliers on Wall Street in the last year or so. Shares of LUV stock are up about 120% in the last year or so, and up over 330% since November 2012.

Southwest airlines LUV stock to buyThere are obvious reasons for the success of Southwest Airlines: For starters, its by far the best run airline, as evidenced both by its profitability and by its customer satisfaction ratings.

For the third consecutive year, Southwest finished atop the list among airlines when it comes to satisfied customers — tied with JetBlue Airways Corporation (JBLU), yes, but still way above any other major carrier — and will almost certainly finish 2014 with the same great track record.

At the same time, LUV stock could nearly double its earnings per share compared with fiscal 2013; in 2013, the company posted EPS of $1.05 and projections call for a consensus target of $1.93.

That’s all great for Southwest Airlines Co and its shareholders who bought in over the last several months. But how long can LUV stock keep this up?

After all, Southwest stock can’t go up forever … or can it?

Southwest Stock Is a Hold

The good news is that I don’t see any flaws in Southwest stock from a balance sheet perspective or from its operations. The company is well-run and will continue to succeed.

However, a lot of the optimism has clearly been priced into LUV stock based on the big run-up over the last two years.

Much of that buying pressure for Southwest been powered by cheap fuel prices and the recent consolidation in the airline business over the last few two years — notably the merger between US Airways Group and defunct American Airlines parent AMR Corporation to form American Airlines Group Inc. (AAL), and allowing for price increases thanks to less competition.

As such, I don’t think it’s likely LUV will see the same big-time gains from here as it has seen in the last year. After all, it’s now trading with a forward price-to-earnings ratio of over 15 compared with earnings multiples of about 11 for both JetBlue and Delta Air Lines, Inc. (DAL). Others like AAL or Hawaiian Holdings, Inc. (HA) that operates Hawaiian Airlines, trade for single-digit P/Es on forward earnings.

That valuation comparison is just not in Southwest’s favor.

All that said, airlines are a highly regulated industry with big barriers to entry, so Southwest will probably remain at the top of the heap. Furthermore, I’m a long-term bull on the American economy and I think that air travel may pick up as consumer spending remains strong and as businesses look to get more of their employees in the air again as the global environment improves.

Thus, while I wouldn’t necessarily buy Southwest stock here, because I think it’s likely LUV stock will cool off soon, I do think investors who bought in with a good cost basis can hold with confidence — particularly if they are patient and have a time horizon of more than just 6-12 months.

In short, LUV stock is a hold — but not a buy — after soaring to these heights.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP.


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