Are airline stocks back? Well, it might be a leap to say that much. However, Southwest Airlines (NYSE:LUV) and its peers may have already seen the lows. If that’s the case, investors are now wondering whether LUV stock can continue to lead the group.
Over the past month, LUV stock is down 12.56%, which is about in-line with its peers. It only “lags” — if you can call it that — Spirit Airlines (NYSE:SAVE) and United Airlines (NASDAQ:AAL), both down 12.2%.
It slightly lags these two over the past three months too, with Southwest stock down about 1%. However, that’s much better than Delta Air Lines (NYSE:DAL) and American Airlines (NASDAQ:AAL), which are down 9.75% and 13.5%, respectively.
Over the longer term though, Southwest has done much better than its peers.
So far on the year, Southwest stock is down 43%. While terrible, that’s almost 15 percentage points better than the next best performer (out of the five major airlines), Delta, down 57.8%.
Over the past year, the outperformance widens even more. Again, Southwest and Delta are No. 1 and No. 2 at -42% and -60.5%, respectively.
Can Southwest Continue to Outperform?
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Southwest Airlines did not report good results in late July. Despite beating both profit and sales estimates, the company lost $2.67 per share and experienced an 83% decline in revenue.
Those are some sizable declines and it will take time for Southwest to recover from the novel coronavirus.
The company lost more than $900 million in the quarter and the hope for a sustainable recovery is losing steam. This is from chairman and CEO Gary Kelly (emphasis added):
“As our Nation continues to battle the COVID-19 pandemic, demand for air travel remains weak, which was the driver of our second quarter net loss of approximately $1.5 billion, excluding special items. We were encouraged by improvements in May and June leisure passenger traffic trends, compared with March and April; however, the improving trends in revenue and bookings have recently stalled in July with the rise in COVID-19 cases.”
However, this is what has always made and continues to make LUV stock the best of the bunch:
“We have strong liquidity, with cash and short-term investments of $14.5 billion as of June 30, 2020; the only investment-grade credit rating in the U.S. airline industry by all three agencies.”
The company’s balance sheet continues to act as a major asset for Southwest. Even during good times, this was a major piece to the bullish puzzle. Now that we’ve seen what a (hopefully) generational pandemic looks like, one can understand why LUV stock has held up so much better than its peers.
Blood in the Streets for LUV Stock?
The old adage to “buy when there’s blood in the street” is certainly on the minds of investors. In the case of Southwest though, that may actually be the best case to make.
The problem with the airlines is how long it will likely take them to recover prior business. Most companies have already seen a stabilization in revenue or should soon. That’s not quite the case with airlines.
Consider the table below, which highlights consensus expectations for 2021.
| Stock | 2021 Estimate | Forecast for % of Recouped 2019 Rev. |
| SAVE | Profitable | 80.6% |
| LUV | Profitable | 75.1% |
| DAL | Profitable | 64.8% |
| AAL | Not Profitable | 65.5% |
| UAL | Break-Even | 64.8% |
As you can see, LUV stock and Spirit — another stock I really like — are the only two forecast to recover 75% or more of 2019 revenue in 2021. Additionally, they are both expected to be profitable, too.
These estimates are bound to fluctuate with the ebb and flow of travel trends, but it’s encouraging to see. Perhaps LUV stock will recover faster than expected, making its current price a possible bargain for longer term investors. Know that there will be volatility, though.
