Normally, the last stock I would suggest owning is an airline stock. Airlines usually are loaded with debt, are at the mercy of the economy as well as fuel prices, and any kind of terrorist incident could crater the entire sector.
Except for one stock, that is. Southwest Airlines (NYSE:LUV) has survived through thick and thin. Actually, they haven’t just survived, they have thrived. The primary reason for this will surprise you. It’s because Southwest isn’t in the airline business. It’s in the freedom business (“You are now free to move about the country”). That concept of freedom is how the company’s founder, Herb Kelleher, reimagined airline travel. He understood right from the beginning that if he could accomplish this, and also make his employees feel like partners in the business, he would gain an advantage on competitors like AMR‘s (NYSE:AMR) American Airlines, United Continental Holdings (NYSE:UAL) United subsidiary and Delta Air Lines (NYSE:DAL).
Both concepts worked. As for freedom, when my JetBlue (NASDAQ:JBLU) plane from Vegas to Burbank was delayed three hours, I pulled up Southwest’s website, bought a ticket and grabbed an even earlier flight via standby — because Southwest’s Vegas-Los Angeles route is so well managed and built out that I had the freedom to do it!
Meanwhile, despite 80% of Southwest employees being unionized, there never has been a labor action. That’s because of Southwest’s corporate culture of putting its employees first. This culture translate into a successful business — a happy employee performs beyond expectations. That translates into a better experience for fliers. The American Customer Satisfaction Index consistently recognizes Southwest Airlines as leading the industry in customer satisfaction. That satisfaction translates to brand loyalty. Southwest doesn’t even need its frequent flyer program.
That brings us to the bottom line. The company has posted an annual profit for 36 consecutive years — and came roaring back in 2010, posting a profit of $459 million versus only $99 million in 2009. This is in stark contrast to the big boys, all of whom have mostly gone bankrupt, filed for bankruptcy and later emerged from it, or have been on the brink of it.
Would you believe that an airline — an airline — has more cash than debt? Southwest has $4.37 billion in cash vs. $3.24 billion in debt. No other airline has that luxury. Southwest has $1.4 billion in free cash flow over the trailing 12 months, beating all of its competitors. AMR actually is cash flow negative.
The stock is dirt cheap. It has lost 50% of its value during the past five years. At a price of $8 per share, it’s approaching its financial crisis panic low of $5.89. Things are much better economically today than back then. The stock has had its share of significant dips, but the ride has been far less turbulent over the past 10 years than its competitors. On an enterprise value-to-EBITDA ratio — which is the best way to value an airline — the company trades at 3.77. No other airline is close, save UAL, which is at 3.1. However, Southwest’s net margins are 3.71% to UAL’s 1.22%, and it has a return on equity of 7.87%, whereas UAL’s is negative.
You are now free to buy the stock.
Disclosure: Lawrence Meyers does not own shares in any company mentioned.