Few industries represent what I call America’s “bailout culture” more than the airlines. After one round of stimulus during the novel coronavirus pandemic, Southwest Airlines (NYSE:LUV) is representing the industry in asking for another one. LUV stock investors are, naturally, watching to see how this beg-a-thon develops.
The company’s CEO, Gary Kelly, recently asked the U.S. government for an extension of its financial support of the airline industry. In doing so, Kelly spoke on behalf of not only Southwest Airlines, but other U.S.-based airlines as well.
There’s a lot at stake here, especially for anyone employed by an airline. Yet there’s also much to consider for current and prospective investors in LUV stock. Does Southwest’s desperation mean that it’s time to give up and sell one’s shares or simply avoid the stock altogether?
Or, is it a bold and potentially lucrative strategy to “buy on fear” in anticipation of better times ahead? Crazy or brilliant, this could be the “desperation trade” that contrarians have been waiting for.
A Closer Look at LUV Stock
One feature of LUV stock that should capture any value-focused investor’s attention is its trailing 12-month price-to-earnings ratio of 101.28x. Personally, I would expect to see a high-flying tech stock having a triple-digit P/E ratio, not an airline stock during a pandemic.
But, strange times make for strange numbers. As low as the price of LUV stock is, evidently the earnings per share have been much lower than that — hence the high P/E ratio. This actually makes sense since U.S. airlines haven’t been generating much in the way of revenues this year.
As for the price of the stock, Southwest Airlines traded slightly below $31 at the end of July. That’s a pretty deep discount compared the the stock’s 52-week high price of $58.83.
So, is LUV stock a discount or not? “Discount” probably isn’t the right word for it. “Fixer-upper” might be the better descriptor. And as real-estate investors know all too well, fixer-uppers take time and patience, though the eventual payoff can make it all worth it.
Flight Plight (Or, Spare Times for Airlines)
While LUV stockholders might be running out of patience, America’s airlines are definitely running out of time and money. The $25 billion that the airlines received through the CARES Act won’t likely last much longer.
Without another round of financial support from the government, the next likely step for the airlines would be layoffs and furloughs. Interestingly, Southwest has never resorted to layoffs, and the company has been around for nearly half a century.
On the other hand, over 25% of Southwest’s employees “volunteered” (if that’s the right word to use in these circumstances) to accept a buyout or an extended leave of absence from their jobs. That, along with CARES Act funding, were likely the lifelines that enabled Southwest to avoid layoffs thus far.
Ask, and Ye Shall (Hopefully) Receive
Another round of begging might seem unseemly, but handouts have become somewhat normalized, or at least more forgivable, during the pandemic. It’s possible, then, that the CEO of Southwest Airlines can ask for more bailout money without backlash from the public.
Besides, what Kelly’s asking for is an extension of the $32 billion payroll-support program. The program, which is set to expire in September, evidently helps to prevent airline-worker layoffs.
Kelly’s asking for more than that, though. He also wants an extension of a tax holiday on tickets. Plus, he wants lawmakers to enact other tax incentives that will, he hopes, motivate Americans to travel more.
After all, “without customers and places and events for them to fly to — we’ll never punch our way out of this crisis,” Kelly argues.
So, will our elected leaders cough up the bailout capital and provide the sought-after tax breaks? For better or worse, they probably will. If politicians ever needed an excuse to spend other people’s money, the pandemic — and the plight of the airlines — is as good as any.
The Bottom Line
Indirectly but assuredly, a stake in LUV stock is a bet on lawmakers’ largesse. And if you can count on anything, it’s the persistence of bailout culture, distasteful as it may be.
David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets. As of this writing, David Moadel did not hold a position in any of the aforementioned securities.