Southwest Airlines (LUV) has had a bumpy year. It ended 2015 about where it started, though there was plenty of travel for the stock in between.
But the encouraging news is that LUV stock has held up well during this extended selloff.
One reason for this stability is the fact that Southwest doesn’t have exposure to a great deal of overseas markets. By concentrating on the North American space, LUV has linked its fate to the U.S. economy.
That means a strong dollar doesn’t matter as much to LUV as it does for competitors like Delta (DAL), because LUV isn’t hurt by converting sales in weaker foreign currencies back to U.S. dollars.
It also means the company’s network is more concentrated and it doesn’t have all the support and distribution costs that intercontinental airlines have to keep their fleets operational.
Southwest Airlines Still in Good Position
The one recent piece of bad news from the airline is a recent Federal court judgment on DAL’s gates at Dallas Love Field airport. As you can gather by the ticker, Love Field is the airport where LUV started its operation — its headquarters are nearby — and has dominated the airport, while other carriers went to the massive Dallas-Fort Worth (DFW) airport.
DAL had a lease for gates where it was running five daily flights. The lease expired in July 2015, but DAL has continued to sell tickets for the flights. The Federal judge stated that it would be too much of an inconvenience to reissue the tickets for DFW and make travelers go to a different airport.
But bear in mind, DAL has five daily flights through Love Field. LUV has 180 daily flights. This is more an issue of territory than it is a competitive business issue. And LUV has plenty of options left to grab total control of Love Field again.
One bright spot for LUV is the low price of oil. This is the lifeblood of the airline industry and the biggest cost for the industry. The discount air carriers are even more sensitive to oil prices than the larger airlines, since they aren’t focusing on high-margin business and first-class passengers.
Oil prices should remain low for most of 2016, which is very good for LUV. Also, the global downturn isn’t an issue for LUV; it shouldn’t be affected by a weak China or Europe because it doesn’t fly there.
As long as the U.S. economy is functioning and growing, even slowly, it plays into LUV’s hands. Consumers and enterprises will remain cost-conscious and look to price as a key factor when traveling. LUV can hedge more of its fuel costs that will boost margins. And new routes will help grow its top and bottom lines.
Compared to its full-fare competitors, and even its low-fare competition, LUV isn’t cheap. Its price-to-earnings ratio is near 15 while most of the other carriers are in the single digits. But Morgan Stanley just raised its weighting on LUV from “underweight” to “equal weight,” and upped its price target to 51.
Why? Because LUV is a unique company, and this sector has a lot of potential.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.
