Is Southwest Airlines Ready To Take Off?

Shares of Southwest Airlines (NYSE: LUV) went into this past weekend up over 2% on Friday and at the week’s high despite the company reporting a miss in their Q4 earnings on Thursday. The Dallas based low cost carrier posted GAAP EPS of $0.98 which was off the consensus by $0.10 and revenue that was off analyst expectations by $10 million and up only 0.5% year on year.

The fact that shares were able to catch a bid all the way into Friday’s close tells us just how much more there can be to a company’s earnings release than a simple beat or miss on expectations.

The report might have been a miss, but it was a miss that was somewhat out of their control. Investors looking at the official press release would have noticed the very first bullet point informing us that EPS was off by $0.18 as a result of their employee profit sharing program which was significantly higher following their $125 million settlement with Boeing (NYSE: BA) in light of the MAX 737 disasters. Southwest has been one of the hardest hit carriers by the grounding of the planes following two deadly crashes earlier last year. They had more MAX planes in their fleet than any other airline in the world at the time of the groundings and Gary Kelly, their CEO, estimated upwards of an $800 million drop in operating income as a result.

Still In The Black

But for all that, the company was still able to keep revenue in the black and achieved a remarkable 47th consecutive year of profitability while expanding its coverage to new airports, most notably in Hawaii.

Kelly said "our operational and financial performances in 2019 were truly remarkable. With the ongoing uncertainty regarding the timing of the MAX return to commercial service, we remained nimble and adjusted our 2019 plans, as necessary, without abandoning our long-term goals. Our financial strength and preparedness for unexpected challenges allowed for sustained high levels of profits, earnings per share, returns on capital, cash flows, and returns to shareholders; continued capital investments and growth in California and Hawaii; and job security for our resilient Employees. We continue to incur financial damages in 2020, and we will continue discussions with Boeing regarding further compensation.”

Performing Better Than Peers

Having traded largely flat for 2019, last week’s action shows that Wall Street obviously agrees with much of Kelly’s optimism and belief in the company’s self-sufficiency. Compared to the other heavyweights that Southwest competes with, for example American (NYSE: AAL), United (NYSE: UAL) and Delta (NYSE: DAL), Southwest’s stock is one of the most robust. Over the past seven years, their shares are up over 400% compared to 325% for Delta, 240% for United and 5%, yes five percent, for American. Over the past six months, Southwest shares are up 13% compared to -1% for Delta, -6% for United and -4% for American.

As they and other airlines have started reporting their latest earnings, the consensus among industry analysts is that consumer demand remains strong despite the Boeing 737 scandal. Even as it starts to look like the launch date for the new model is going to be well pushed back from the original dates, Southwest still looks best positioned of the major carriers to weather the storm.

Looking Ahead

In the meantime, the extra dollars that would have been used to purchase more 737s mean the company’s free cash flow has greatly increased so there are more dollars available for investors via dividends and buybacks, two things Southwest have prided themselves on delivering.

Technically, shares have a solid rising trend line that’s been in play since 2014 and which is starting to form a tightening pennant with a downtrend from the stock’s all-time highs from the end of 2017. As the range narrows, this is suggesting that shares are approaching an upcoming inflection point and considering they’ve shown themselves to be resilient during the tough times, any further settlements from and progress with Boeing should only serve to drive the case for a breakout to the upside.