It hasn’t been a great year for Southwest Airlines Co. (NYSE: LUV) Southwest Airlines stock has had it’s problems, but so have many airline stocks.
Airline stocks started in a downward trend since January 2019 for an assortment of reasons. A pair of crashes from the 737 MAX made by The Boeing Company (NYSE: BA) did not help matters.
Higher oil prices, which recovered and are back to the $60 per barrel level is another macro headwind that adds to costs for airlines. With this negative backdrop considered, why should investors consider ?
Southwest Airlines posted revenue growth in the single digits of 3%-4% in its latest 8-K filed a few weeks ago. This is slightly below its annual growth rate of 7.2%. To narrow the gap, the airline added a net 25 airplanes, grew its ASM (available seat miles) to 5% with half of that allocated to Hawaii. That mix should increase the firm’s market share for vacation destinations in that region.
Southwest Airlines Stock Faces Near-Term Headwinds
Market selling pressure on LUV stock accelerated since January in anticipation of weak quarterly results. Flight cancellations and an unprecedented number of write-ups that led to many out-of-service aircraft units cost the company millions of dollars weekly. These costs led to a suit against the AMFA.
Though negotiations dragged longer than desired, such near-term headwinds are temporary. Besides, in the past five years, Southwest delivered over 20% year on year in earnings growth in the past five years.
Higher oil costs may weigh on profits but energy price fluctuations are a constant unknown. As such, investors should not pay too much attention to it. Instead, investing in oil stocks to hedge against higher oil prices would help diversify the portfolio.
Boeing Issues and Southwest Airlines Stock
Regulators around the world will eventually end the grounding of the 737 MAX. Southwest is still moving forward with adding 500 more aircraft to its fleet. This will include 737 models. And despite the heavy coverage on the plane crashing with Ethiopian Airlines, Southwest believes this plane has technology advantages.
Besides, the plane’s size fits the Southwest’s needs in a medium-sized, narrow body fleet. Planes that are smaller do not have the same cost-benefit market opportunities.
As Boeing fixes issues related to the 737 and countries around the world lift restrictions, Southwest’s operations will return to normal.
Southwest Airline Stock Still Is a Buy
Southwest stands by its commitment to have Boeing MAX planes in its fleet. Combined with the company’s strong balance sheet, low levels of debt, low-cost structure and seasonal holiday traveling strength ahead, buying LUV stock at these levels presents an opportunity.
The low operating cost model is another attractive attribute for Southwest Airlines. The three cost categories are people costs, fuel, and everything else. And because people costs take up 40% of the total, well-paid staff will bring good quality services for its customers.
As the airline spends the next few years driving more traffic in foreign countries, it needs to keep its cost structure low without sacrificing on service quality.
The Bottom Line on Southwest Airline Stock
Southwest Airlines trades at an 11 times P/E, higher than that of Delta Air Lines, Inc. (NYSE: DAL), American Airlines Group Inc. (NYSE: AAL) but below that of JetBlue Airways Corporation (NASDAQ: JBLU). Given that Southwest just reported record free cash flow last year, manageable debt, and plenty of cash, the stock is more attractive than the discount airline, JetBlue.
Delta shares would suit income investors, with the stock dividend yielding 2.85% compared to 1.3% with LUV stock. American Airlines “double-bottomed” at $30 a share and could potentially rebound alongside LUV stock.
There are 13 analysts covering LUV stock who have an average price target of $61 a share, according to Tipranks. At a recent price of around $50, LUV shares have an upside of around 22%.
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.