No Smooth Skies for Southwest Air Just Yet

Southwest Airlines (NYSE:LUV) was once one of the darlings of the airline business, but when an industry sneezes, it’s hard even for the strong names to avoid catching colds. That’s the case with LUV stock at the hands of Covid-19.

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Year-to-date, once-burly Southwest is lower by 49%. Confirming that investors aren’t quite ready to wager on a rebounds for any carrier, the stock sank 12.24% in April, a month in which the S&P 500 jumped 12.7%.

With economic data, including the big kahunas of consumer spending and employment deteriorating at a rapid pace, it’s easy for investors to be bearish on cyclical stocks, particularly ones with deep economic sensitivity such as airlines. It’s even easier to take a pass on Southwest with the company coming off its first quarterly loss in nearly a decade.

The company even said it can’t offer much in the way of revenue visibility beyond May. It could also endure a rash of cancellations late this quarter and to start the third quarter.

“We have no idea what kind of cancellations will come through before those travel dates; there’s no way to be comfortable with what will happen to those reservations,” said CEO Gary Kelly in an interview with Reuters.

It Can and Should Get Better

As Kelly noted on the company’s earnings conference call, “the current outlook for second quarter 2020 indicates no material improvement in air travel trends.” That jibes with what investors are hearing from CEOs in other industries. The second quarter is likely going to be the worst for the U.S. economy vis-a-vis Covid-19.

There’s no denying that the novel coronavirus is dramatically reshaping the travel and leisure industry. From airlines to casinos to cruise operators, it’s going to be a long time – probably several years – before these companies come close to resembling their 2019 selves. However, there are some inklings that the market’s worst treatment of Southwest is a thing of the past.

The Dallas-based carrier is diluting shareholders in a major way, recently announcing a public offering of 70 million shares and $2 billion worth of convertible notes. Convertibles are corporate debt that will later be converted into common stock by the bondholders.

Two things regarding those offerings: First, they were announced earlier in the final week of April, but the stock sported a weekly gain for that period.

Second, the equity offering was boosted to $70 million from $55 million, while the convertible offering was upsized to $2 billion from $1 billion, indicating that demand is robust for Southwest securities. The case of Southwest’s convertible sale is particularly poignant. In the event of bankruptcy, holders of those bonds are lower on the totem pole for asset claims than traditional corporate debt owners are.

If banks’ bond desks thought Southwest was in danger of encountering insolvency, they wouldn’t be rushing to buy what would eventually become worthless paper.

Bottom Line on LUV Stock

Another thing to consider with Southwest is the cash burn rate. The carrier is expecting to burn $30 million to $35 million per day on payroll expense in the second quarter, but that’s well below the $60 million to $65 million Wall Street expected.

Make no bones about it: Southwest or any other carrier is a long-term redemption story. If you’re looking for a quick 10% in a month type of trade, it’s probably best to look elsewhere, but if the company can steady itself in the current quarter, the stock could prove to be one of the better long-term airline bets.

Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/05/luv-stock-on-less-shaky-ground-than-some-of-its-rivals/.

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