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Southwest (LUV) Up 30.3% Since Last Earnings Report: Can It Continue?
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It has been about a month since the last earnings report for Southwest Airlines (LUV - Free Report) . Shares have added about 30.3% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Southwest due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Narrower Than Expected Loss in Q4
Southwest Airlines incurred a loss of $1.29 per share (excluding 25 cents from non-recurring items) in the fourth quarter of 2020, narrower than the Zacks Consensus Estimate of a loss of $1.69. In the year-ago period, the company had reported earnings of 98 cents per share. Results were affected by significant decline in passenger revenues as a result of persistent weakness in air-travel demand amid coronavirus concerns.
Meanwhile, operating revenues of $2,013 million lagged the Zacks Consensus Estimate of $2,117.5 million. The top line declined 64.9% year over year, with passenger revenues accounting for bulk (82.6%) of the top line, sliding 68.7%.
Operating Statistics
Airline traffic, measured in revenue passenger miles, declined 61.5% year over year to 12.78 billion in the quarter under review. With reduced passenger demand as a result of the coronavirus pandemic, capacity or available seat miles (ASMs) fell 40.6% to 23.76 billion. Load factor (percentage of seats filled by passengers) came in at 53.8%, down 2930 basis points on a year-over-year basis as the decline in traffic was wider than the capacity contraction.
Passenger revenue per available seat mile (PRASM: a key measure of unit revenues) dropped 47.3% to 7 cents. Moreover, revenue per available seat mile (RASM) declined 40.8% year over year to 8.48 cents, owing to decline in load factor and passenger revenue yield.
Operating Expenses & Income
In the fourth quarter, operating loss totaled $1,169 million against operating income of $665 million in the year-ago quarter. Total adjusted operating expenses (excluding profit sharing, special items, fuel and oil expenses) dropped 23.1%, thanks to the company’s cost-cutting measures and reduction in salaries, wages and benefits, among other expenses.
Fuel cost per gallon (inclusive of fuel tax: economic) was down 40.2% to $1.25. However, consolidated unit cost or cost per available seat mile (CASM) excluding fuel, oil and profit-sharing expenses, and special items, increased 29.4% year over year to 11.96 cents due to significant reduction in capacity.
Liquidity
This company had cash and cash equivalents of $11,063 million at the end of the fourth quarter, compared with $2,548 million at the end of 2019. As of Dec 31, 2020, the company had long-term debt (less current maturities) of $10,111 million compared with $1,846 million at 2019-end.
Outlook
Southwest stated that demand for January and February has stalled primarily due to continued rise in coronavirus cases as well as seasonal softness in leisure travel demand. However, with trip cancellations having stabilized, the airline anticipates operating revenues to decline 65-70% in January from the 2019 levels, compared with a decrease of 65-75% anticipated previously. The same is expected to drop 65-75% from the 2019 levels in February. The carrier expects capacity to decline approximately 41% year over year in January. The same is anticipated to fall 46% in February and 16% in March. With continued softness in travel demand as well as seasonally weak travel period in January and February, the company predicts average core cash burn to worsen in the first quarter to approximately $17 million per day from approximately $12 million per day in fourth-quarter 2020.
Thanks to the airline’s fleet modernization efforts, lower utilization of its 737-700 aircraft as well as anticipated benefits of the reintroduction of the MAX aircraft, the carrier expects fuel efficiency to improve 5-6% year over year in the first quarter of 2021.
Economic fuel costs per gallon are expected to be in the band of $1.60-$1.70 in the first quarter of 2021, compared with $1.90 in the year-ago period. The same for 2021 is anticipated in the range of $1.65-$1.75, compared with $1.49 in 2020.
The carrier anticipates operating expenses (excluding fuel and oil expenses and special items) to decline 15-20% year-over-year in the first quarter primarily due to lower capacity as well as an estimated $400 million of cost savings from voluntary separation and extended leave programs. Having realized approximately $565 million of cost savings in 2020, the company expects additional savings of $600 million in the current year, owing to reduction in salaries, wages and benefits of approximately $1.2 billion from the 2019 levels. The company, having reduced capital expenditures significantly, does not expect the same to be more than $500 million.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -63.96% due to these changes.
VGM Scores
Currently, Southwest has a poor Growth Score of F, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Southwest has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
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Southwest (LUV) Up 30.3% Since Last Earnings Report: Can It Continue?
It has been about a month since the last earnings report for Southwest Airlines (LUV - Free Report) . Shares have added about 30.3% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Southwest due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Narrower Than Expected Loss in Q4
Southwest Airlines incurred a loss of $1.29 per share (excluding 25 cents from non-recurring items) in the fourth quarter of 2020, narrower than the Zacks Consensus Estimate of a loss of $1.69. In the year-ago period, the company had reported earnings of 98 cents per share. Results were affected by significant decline in passenger revenues as a result of persistent weakness in air-travel demand amid coronavirus concerns.
Meanwhile, operating revenues of $2,013 million lagged the Zacks Consensus Estimate of $2,117.5 million. The top line declined 64.9% year over year, with passenger revenues accounting for bulk (82.6%) of the top line, sliding 68.7%.
Operating Statistics
Airline traffic, measured in revenue passenger miles, declined 61.5% year over year to 12.78 billion in the quarter under review. With reduced passenger demand as a result of the coronavirus pandemic, capacity or available seat miles (ASMs) fell 40.6% to 23.76 billion. Load factor (percentage of seats filled by passengers) came in at 53.8%, down 2930 basis points on a year-over-year basis as the decline in traffic was wider than the capacity contraction.
Passenger revenue per available seat mile (PRASM: a key measure of unit revenues) dropped 47.3% to 7 cents. Moreover, revenue per available seat mile (RASM) declined 40.8% year over year to 8.48 cents, owing to decline in load factor and passenger revenue yield.
Operating Expenses & Income
In the fourth quarter, operating loss totaled $1,169 million against operating income of $665 million in the year-ago quarter. Total adjusted operating expenses (excluding profit sharing, special items, fuel and oil expenses) dropped 23.1%, thanks to the company’s cost-cutting measures and reduction in salaries, wages and benefits, among other expenses.
Fuel cost per gallon (inclusive of fuel tax: economic) was down 40.2% to $1.25. However, consolidated unit cost or cost per available seat mile (CASM) excluding fuel, oil and profit-sharing expenses, and special items, increased 29.4% year over year to 11.96 cents due to significant reduction in capacity.
Liquidity
This company had cash and cash equivalents of $11,063 million at the end of the fourth quarter, compared with $2,548 million at the end of 2019. As of Dec 31, 2020, the company had long-term debt (less current maturities) of $10,111 million compared with $1,846 million at 2019-end.
Outlook
Southwest stated that demand for January and February has stalled primarily due to continued rise in coronavirus cases as well as seasonal softness in leisure travel demand. However, with trip cancellations having stabilized, the airline anticipates operating revenues to decline 65-70% in January from the 2019 levels, compared with a decrease of 65-75% anticipated previously. The same is expected to drop 65-75% from the 2019 levels in February. The carrier expects capacity to decline approximately 41% year over year in January. The same is anticipated to fall 46% in February and 16% in March. With continued softness in travel demand as well as seasonally weak travel period in January and February, the company predicts average core cash burn to worsen in the first quarter to approximately $17 million per day from approximately $12 million per day in fourth-quarter 2020.
Thanks to the airline’s fleet modernization efforts, lower utilization of its 737-700 aircraft as well as anticipated benefits of the reintroduction of the MAX aircraft, the carrier expects fuel efficiency to improve 5-6% year over year in the first quarter of 2021.
Economic fuel costs per gallon are expected to be in the band of $1.60-$1.70 in the first quarter of 2021, compared with $1.90 in the year-ago period. The same for 2021 is anticipated in the range of $1.65-$1.75, compared with $1.49 in 2020.
The carrier anticipates operating expenses (excluding fuel and oil expenses and special items) to decline 15-20% year-over-year in the first quarter primarily due to lower capacity as well as an estimated $400 million of cost savings from voluntary separation and extended leave programs. Having realized approximately $565 million of cost savings in 2020, the company expects additional savings of $600 million in the current year, owing to reduction in salaries, wages and benefits of approximately $1.2 billion from the 2019 levels. The company, having reduced capital expenditures significantly, does not expect the same to be more than $500 million.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -63.96% due to these changes.
VGM Scores
Currently, Southwest has a poor Growth Score of F, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Southwest has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.