LUV – Southwest Stock Soars Above the Airline Crowd

Welcome to the Stock of the Day!

SouthwestAirlinesLogoIn my opinion, Southwest Airlines  (LUV) is by far the most efficient passenger airline in the U.S. But now that two of its rivals are merging to form the largest airline in the world (US Airways (LCC) and the parent company of American Airlines), can Southwest keep up its track record of out-performance? Find out now.

Company Overview

With nearly 700 aircraft in its fleet, Southwest serves 97 destinations across 41 states, the District of Columbia and Puerto Rico. And it is somewhat of an anomaly in the otherwise troubled U.S. airline industry. To start, the company has been smart in hedging its fuel costs, so it is able to undercut the competition. Southwest Airlines has been known for having some of the most affordable fares—and highest customer satisfaction ratings—in the business. And now that Southwest Airlines is integrating AirTran Airways into its operations, the company is benefiting from a surge in revenue.

Acquisition Buzz

Southwest recently announced that it’s purchasing a dozen takeoff and landing slots from American Airlines at New York’s LaGuardia Airport. Meanwhile, Southwest Airlines has gained permanent control of ten other takeoff slots that it was leasing at the airport.

At time of writing this, 27 round-trip Southwest flights take off from LaGuardia every day. This acquisition will add another six round-trip flights. These particular takeoff slots are coveted because LaGuardia is the busiest airport in the United States, and the only reason that American Airlines parted with them was to settle an antitrust lawsuit related to its merger with US Airways. So American Airlines’ loss is now Southwest Airline’s gain.

Competition Breakdown

Southwest has some stiff competition to contend with, including Delta Air Lines (DAL) and JetBlue (JBLU). Right now, all three are buys in my Portfolio Grader screening tool. If you compare Southwest to the Regional Airlines industry, you’ll see that this company ranks towards the top on most fundamental metrics.

Southwest Airlines is first in terms of market cap, first in earnings growth, second in long-term growth rate and fourth in terms of its annual dividend yield (0.9%). Meanwhile the company ranks in the top half in terms of return on equity. However, in terms of sales growth, this is a middle-of-the-road company.

Current Ratings

Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. In the past year, the company has taken off (in more ways than one). On the heels of its AirTran acquisition, institutional interest in this stock has picked up, so LUV receives an A for its Quantitative Grade.

Southwest has also firmed up many of its fundamental metrics, including earnings growth, earnings momentum and analyst earnings revisions (all A-rated). However, there is room for improvement, especially in sales growth, earnings surprises and cash flow (all C-rated). LUV receives a B for its Fundamental Grade.

Bottom Line: As of this posting I consider LUV an A-rated Buy.

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