“I mean, believe me, no joy being a CEO of an airline,” said Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) CEO Warren Buffett recently. It’s equally fair to say that there has been no joy in holding Southwest Airlines (NYSE:LUV) stock in 2020.
In a rare and uncharacteristic move, Buffett recently gave up on several of his holdings, selling off millions of dollars’ worth of airline-sector stocks. His stake in LUV stock was included in this massive and disappointing sell-off.
Unlike Buffett, some investors are opting to hold on to their shares. Perhaps they’re even seeing the current situation as a buying opportunity. Maybe they’re seeing LUV stock as being half-price since the shares plummeted from $58 in February to $27 in May.
But it’s not wise to focus on price in exclusion of everything else. As Buffett once said, price is what you pay, but value is what you get. And even at a reduced price, it’s awfully hard to find real value in LUV stock now.
“Narrower Than Expected” Isn’t Good Enough
Because of the economic damage wrought by the novel coronavirus, analysts have steeply lowered their expectations. This can have the effect of lulling investors into complacency. Just because an earnings or revenue miss is “narrower than expected” doesn’t mean that the company is doing well.
To see how this applies to LUV stock, let’s break down the data for the company’s first quarter. Excluding non-recurring items, Southwest’s quarterly adjusted per-share loss came to 15 cents.
That’s bad news by any logical standard, but some glass-half-full investors might not see it that way. They might point out that a 15-cent loss is better than the analysts’ consensus estimate of a 37 cents.
Let’s not confuse “comparatively better than” with “good,” though. Besides, Southwest didn’t beat the analysts’ expectations on all counts. The company’s quarterly revenue declined by 18% to $4.23 billion. That’s worse than the consensus estimate of $4.52 billion in quarterly revenue.
Southwest cited a number of factors leading to the dismal quarterly revenue outcome. Those factors included the “unprecedented” number of trips that were canceled in March, a decline in trip bookings, and a drop-off in demand generally.
Trying to Find Value
The aforementioned factors are legitimate reasons for Southwest’s decline in revenue. Still, identifying the contributing factors shouldn’t be enough to reassure concerned investors. There needs to be a compelling reason to hope for a brighter future for Southwest, and for the aviation industry in general.
You might have a difficult time finding reasons to believe in a turnaround. Southwest admitted that in May the company’s revenue is projected to fall by 90% to 95%.
That unsettling reality wasn’t factored into Southwest’s dreadful first-quarter results. May’s terrible fiscal results will, however, be factored into the next earnings report. Buffett apparently won’t have to worry about that now.
But anyone who holds his or her LUV stock shares through the next earnings announcement will be taking a big risk. Maybe there will be another “narrower than expected” loss in quarterly revenue. That hope, by itself, isn’t a compelling reason to own shares of a company.
It’s better to own a company’s stock because you genuinely believe that the company will provide value to shareholders. This circles back to Buffett’s principle that value is what you get, or at least what you’re supposed to get, when you buy a stock.
For the time being at least, there’s not much of a value proposition with LUV stock. Airlines in the U.S. collectively burn over $10 billion on a monthly basis. Southwest is contributing to this worrisome statistic by burning through $30 million to $35 million each and every day.
The Final Word on LUV Stock
Holders of LUV stock might get a quick share-price bump if the company manages to post another “narrower than expected” revenue loss in the upcoming quarter. That’s not a sound basis for a serious investment, and it’s certainly no reason to buy or hold LUV stock now.
Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.
