Even with the U.S. GDP shrinking by 4.8% for the first quarter of 2020, stocks have witnessed a strong rally. The reason relates to positive trial data from Gilead Sciences (NASDAQ:GILD) in the treatment of the novel coronavirus. If there is further progress on this front, I believe that the worst hit sectors will stage a strong comeback rally. The airlines sector is therefore in focus and Southwest Airlines (NYSE:LUV) stock looks interesting. On the downside, LUV stock has shown strong support around $30 levels and I believe that the stock is positioned to trend higher.

In terms of Q1 2020 performance, Southwest Airlines earnings per share beat analyst expectation while revenue missed estimates. However, I believe that the markets are unlikely to focus on the revenue and EPS. I will therefore discuss the liquidity and credit perspective, which will justify the bullish outlook on LUV stock.

Well Positioned to Navigate Headwinds

With the onset of the coronavirus driven crisis, Southwest Airlines has been on a fund-raising spree. This is important since a few quarters of cash burn is likely.

As of April 24, the company reported cash and short-term investments of $9.3 billion. The current liquidity buffer is likely to be sufficient through the year and potentially into fiscal year 2021.

To put things into perspective, the company expects to burn cash of $30 million to $35 million per day for Q2 2020. This would imply a cash burn of $3.2 billion for the quarter and includes cash outflows, capital expenditures and debt service. Importantly, Southwest Airlines had earlier expected a cash burn of $60 million to $65 million per day. In the coming quarters, the cash burn can reduce further through cost cutting. Therefore, with the current liquidity, the company will stay afloat in these challenging times.

It’s also worth noting that the company currently has a leverage of 47%. This gives ample leveraging headroom. Considering the fact that the company has unencumbered assets worth $8 billion, raising debt should not be a challenge. As I write, the company has further raised $2.0 billion in senior notes. The proceeds will be used to repay a portion of the outstanding borrowings under the credit facility.

As a matter of fact, Southwest Airlines is the only airline in the U.S. with an investment grade rating. With ample liquidity and cost cutting initiatives, the investment grade rating is likely to hold. A strong credit profile makes LUV stock attractive as compared to United Airlines (NASDAQ:UAL) and American Airlines (NASDAQ:AAL).

Slow Uptick Likely in Travel Bookings

For April, the Southwest Airlines filled 6% of seats and expects bookings at 10% for May. Clearly, the coming quarter will be disappointing. However, this factor is discounted in LUV stock. With U.S. states pushing to re-open the economy, the markets will keenly watch airline bookings for Q3 2020.

Southwest Airlines is offering passengers personal protection equipment kits. In addition, the airline plans to run partially booked planes that offer distancing among travelers. Confidence building is the key for passengers to return. I expect relative increase in bookings in the coming months through these initiatives. This can help reduce the cash burn to some extent.

Additionally, if we look at The Conference Board forecast, real GDP is likely to shrink significantly for Q2 2020. However, real GDP is expected to stabilize in the third quarter and a strong economic expansion is likely in Q4 2020. This supports my view that the second half of the year is likely to be better.

A risk to this assumption is a potential second wave of coronavirus infections in winter. From a company specific perspective, Southwest Airlines is expected to pursue further liquidity infusion. This will position the company to remain afloat even if the crisis extends into FY2021.

My Concluding Views on LUV Stock

Among the U.S. airline stocks, Southwest Airlines is best positioned from a credit perspective to navigate the headwinds. With dividend and repurchase suspension coupled with aggressive cost cutting; the company has been slowing the cash burn. Further, the company will benefit from low fuel prices in the coming year.

There is little doubt that this is one of the worst phases for the airline industry. However, oversold stocks will continue to present an attractive buying opportunity. LUV stock is worth considering as the coronavirus wave peaks and there is relative optimism for the foreseeable future.