Weighing The Opportunity In Southwest Airlines (NYSE: LUV)

With Southwest’s (NYSE: LUV) shares back above where they were trading before the COVID pandemic, it’s a good time to take stock and see where they might head to next. Compared to the rest of the big airlines, they’re by far the best performing of the lot and indeed the only one that’s completely undone last year’s damage, to the share price at least.

Shares of the Dallas headquartered major are up more than 160% since this time last year and are carrying a fair bit of momentum with them into Q2. This hasn’t gone unnoticed. Before the bell rang for yesterday’s session, the folks over at Argus were out with an upgrade to the stock, moving them from Hold to a Buy rating.

In a note to clients, analyst John Staszak said "we view Southwest as one of the best low-cost carriers, with a record of stable earnings prior to the pandemic and a strong management team. We also believe that Southwest, with more than $14 billion in liquidity and an emphasis on leisure travelers, is the airline best positioned to emerge strongly from the coronavirus crisis. We are maintaining our long-term Buy rating based on the company's record of above-peer-average revenue growth, driven by its simple fare structure and reputation for generally good customer service."

Recovery Potential

This is all good stuff for investors on the sidelines to be thinking about. Having withstood the brunt of the pandemic, thoughts are now turning to what a reopened economy might look like down the line when the majority of the population has been vaccinated. The prospects of a full earnings recovery in the next 1-2 years are incredibly strong and management has already been making moves to widen their network and increase market hold. For example, earlier this month they announced flights to three new cities which makes it a total of 17 new airports they’ve announced flights to since the pandemic started.

Further buoyancy to shares has come from other management updates, like the one from earlier this month that had their cash burn forecasts well below the consensus, and another that had March’s revenue forecasted not to fall by nearly as much as previously thought. They also intimated that they’re seeing a nice uptick in bookings farther out in the booking curve as consumers start planning their post-COVID trips.

Getting Onboard

This bullish sentiment is shared by their peers, even if their shares aren’t seeing the same strong bid. American Airlines (NASDAQ: AAL) CEO Doug Parker said last week that "our last three weeks have been the best three weeks since the pandemic hit, and each week has been better than the one prior”. United Airlines (NASDAQ: UAL) CEO Scott Kirby has said they plan to generate “core” cash instead of burning cash for March, and expects the positive trend to continue in the months ahead.

With all that in mind, you can’t really not like anything about Southwest right now. We can be fairly confident of the pandemic continuing to recede while airline traffic increases, with a ton of pent of demand set to hit the market in the next 1-2 years. Southwest was at all-time highs before the pandemic hit and is back trading close to all-time highs a year later.

That’s a bid you don’t really want to be betting against and if anything, you should be considering adding to it.