Southwest Airlines (NYSE:LUV) entered the COVID-19 era as the strongest of the airline stocks. LUV stock still is.
Southwest opens for trade June 10 at about $36 a share. That’s down almost 30% for the year. But Delta Air Lines (NYSE:DAL), American Airlines (NYSE:AAL) and United Airlines (NYSE:UAL) are all down more. Speculators are already making money on the stock, following a bottom below $24 in mid-May.
Southwest took $3.2 billion from the CARES Act, including a loan of nearly $1 billion with warrants on 2.6 million shares. So far it has received 70% of the money. The warrants represent a stake of about 3%.
With its survival practically assured, assuming the pandemic ends in 2020, Southwest is now planning to ramp up its full schedule by December.
Still Rising?
Southwest’s plans put it ahead of its rivals with increased flights into Denver, Las Vegas, Phoenix, and Nashville, while others are cutting back. It’s still cutting 111 routes, mostly cross-country runs and planes out of Ft. Lauderdale. There it competes with Spirit Airlines (NASDAQ:SAVE) and JetBlue (NASDAQ:JBLU).
While Southwest didn’t do any layoffs during the pandemic lock down, it cut 30% of its positions through buyouts and temporary leaves.
In addition to adding routes, Southwest is rejoining part of the booking mainstream. Travel agents on Sabre and Apollo will be able to book Southwest’s U.S. flights as they do other airlines through the Global Distribution Network. U.S. booking will still be handled exclusively by Southwest’s SWABIZ system.
All this has brought Wall Street back to Southwest’s side. UBS recently upgraded it to “buy.”
While Southwest is returning to service and passenger traffic is growing, there’s still a question of how far and how fast people return. CEO Gary Kelly has said airlines are no more dangerous than anywhere else, with respect to the virus.
But a Purdue visualization from April showed a single cough quickly spreading droplets throughout an airline cabin. While some passengers will jump onto planes quickly, others may wait for a vaccine. (I’m one of them.)
The Risks
The current quarter is expected to be the airline’s low point. Just $540 million in revenue is expected when it reports July 28, and a loss of $3.07 per share. The airline estimates it lost $30-$35 million a day during the lock down. The last pre-pandemic quarter, ending in December, saw $5.73 billion of revenue and earnings of 98 cents per share.
How fast revenue ramps up during the next six months will determine Southwest’s near-term profitability. The current stock price is just 10 times last year’s earnings, but that’s misleading, as there are no earnings right now. A lot of stocks that look cheap on a PE basis are going to look expensive after the second quarter numbers.
That could create a buying opportunity once small investors recognize it. IP.com’s Thomas Niel expects another pullback.
The Bottom Line on LUV Stock
Whether or not Southwest stock tests its lows, it’s now attractive to long-term investors.
The company has gotten enough cash from the government to get through the year. Traffic is going to grow, although we don’t know by how much. By the middle of 2021, it’s likely the pandemic will be in the rear-view mirror.
There is going to be turbulence. A second wave of infections is likely. Some of that turbulence is hitting right now, the stock having fallen nearly 10% in just two days.
You don’t need to rush into Southwest, but investing, unlike trading or speculating, isn’t about getting the last dollar. It’s about getting in before takeoff and strapping in. If you’re looking five years ahead, you have that visibility with Southwest stock now.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.
