Southwest Airlines Co (LUV): You Should Love LUV Stock

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Southwest Airlines Co (NYSE:LUV) reported record second-quarter earnings this morning. So why are investors selling LUV stock off by the bundle?

Southwest Airlines Co (LUV): You Should Love LUV StockThe low-cost airline appears to be a victim of its own recent earnings success. At $1.19, Southwest’s adjusted earnings per share improved 15.5% from the same quarter a year ago, while sales increased 5.3% to $5.38 billion. Not good enough — analysts were expecting earnings-per-share of $1.21 and sales of an even $5.4 billion.

It’s easy to see why expectations were so high. LUV had averaged 82.6% EPS growth over the previous four quarters, and this was the weakest year-over-year sales growth since the second quarter of 2015.

High Fuel Costs, Low Fares Hurt LUV Stock

There were a couple of reasons for the top- and bottom-line misses. For starters, Southwest paid well above spot prices for fuel due to previously existing advance contracts, forking over an average of $1.81 per gallon in the second quarter against an average of $1.31.

Lower-than-expected fares also weighed on Southwest’s sales. Revenue per passenger mile declined 3.5%.

Wall Street saw enough negatives to punish LUV stock in pre-market trading, as shares were knocked back as much as 5.5% before Thursday’s opening bell. It’s the latest in a series of wild swings for LUV.

Since the beginning of 2015, LUV has been a volatile stock, vaulting as high as 49 last December to as low as 32 this time a year ago. There’s no obvious reason as to why the stock has been on such a yo-yo; in addition to the stellar earnings growth of previous quarters, sales growth has been steady, ranging between 5% and 11% over the last four quarters.

The recent recovery in oil prices has certainly hurt airline stocks. When oil prices plummeted in the second half of 2014 and all of last year, airline stocks got a big boost, as much as 44% on average at one point. They’ve cooled off lately. And after this morning’s earnings miss, LUV will continue to cool, dipping back below its 50- and 200-day moving averages.

LUV stock actually started to fall on Wednesday after a technological problem grounded Southwest flights across the country for about three hours. So, it has been a rough 24 hours for the company.

I say there’s no better time to buy LUV stock.

LUV: Good Growth Story, Cheap Stock

Look, there’s nothing actually wrong with the company. Earnings growth slowed, but that was due mostly to a miscalculation about how far fuel prices would fall. Sales slowed too, but 5% is nothing to sneeze at. And as for the technological issues yesterday, that’s a minor embarrassment that will be forgotten in a few days by everyone except the passengers who had their flights delayed for three hours. They’ll eventually get over it too — it wasn’t like they were poisoned with E. coli.

Southwest’s top- and bottom-line growth is still well ahead of most of its competitors. Neither American Airlines Group Inc (NASDAQ:AAL) nor United Continental Holdings Inc (NYSE:UAL) has grown sales since 2014, and Delta Air Lines, Inc.’s (NYSE:DAL) have slipped for four straight quarters. And here’s the real kicker: LUV is dirt cheap, trading at less than 10 times forward earnings prior to this morning’s nosedive.

With plans to expand capacity by 5% to 6% this year and 15% EPS growth expected for full-year 2016, Southwest stock is a bargain. The last 24 hours — and investors’ predictably heavy-handed response to it — have created an ideal entry point into a strong stock.

LUV is the rare stock that has risen four-fold over the last five years, yet remains incredibly cheap. To me, it’s a screaming buy — especially after this morning’s earnings miss.

As of this writing, Chris Fraley did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/07/love-luv-stock-southwest-stock/.

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