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Here's Why You Should Retain Southwest Airlines (LUV) Stock

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Southwest Airlines (LUV - Free Report) is benefiting from an uptick in air-travel demand (particularly on the leisure front) and the same is expected to continue. However, escalated fuel costs, a primary headwind, are limiting its bottom-line growth.

Factors Favoring LUV

The gradual improvement in air-travel demand is a huge boon for Southwest Airlines, currently carrying a Zacks Rank #3 (Hold). Management expects fourth-quarter 2022 operating revenues to register 13-17% growth compared with 2019 levels.

Southwest Airlines’ fleet-modernization efforts are commendable as well. LUV expects to end the next year with 841 planes in its fleet.

Following the lifting of restrictions under the CARES Act, which prohibited airlines from paying dividends till Sep 30, management reinstated its quarterly dividend of 18 cents per share. With the carrier returning to profitability in March 2022 and expecting to be profitable for full-year 2022 as well, the decision was hugely-expected. The dividend will be paid out on Jan 31, 2023 to its shareholders of record at the close of business on Jan 10, 2023.

Southwest Airlines' liquidity position raises optimism in the stock. At the end of the third quarter, the carrier’s cash and cash equivalents were $10,443 million, higher than the long-term debt (less current maturities) of $8,315 million, implying that the company has enough cash to meet its debt obligations.

Key Risks

Escalating fuel costs pose a threat to the company’s bottom line. Oil price is moving north, primarily because of supply concerns stemming from Russia-Ukraine war.

In third-quarter 2022, fuel price per gallon escalated 68.7% to $3.39. Fuel cost per gallon in fourth-quarter 2022 is expected in the $3.10-$3.20 band. The midpoint of the guided range is much higher than the fourth-quarter 2021 actuals of $2.25.

Southwest Airlines expects fourth-quarter 2022 capacity to decline 2% from the fourth-quarter 2019 actuals. For 2022, capacity is expected to decline 7.5-9.5% from the 2019 levels. Due to low capacity, CASM (cost per available seat miles), excluding fuel and special items, is high and is expected to increase 14-18% in fourth-quarter 2022 from the fourth-quarter 2019 actuals.

With airlines having trimmed their labor force substantially during the peak of the pandemic, the airline industry is grappling with a staffing crunch as demand bounces back and LUV is no exception.

Stocks to Consider

Investors interested in the broader Transportation sector may, however, consider the following better-ranked stocks:

Covenant Logistics (CVLG - Free Report) : CVLG offers a portfolio of transportation and logistics services, including asset-based expedited, dedicated and irregular route truckload capacity, beside asset-light warehousing, transportation management and freight brokerage capability.

The gradually improving freight market scenario is a tailwind for Covenant. CVLG’s cost-control efforts are appreciated as well. CVLG currently sports a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for 2022 earnings has been revised 10.1% upward in the past 60 days. You can see the complete list of today’s Zacks #1 Rank stocks here.

Teekay Tankers (TNK - Free Report) TNK is well-served by the increase in tanker rates. A gradual ramp-up in economic activities also bodes well. High fuel costs are, however, weighing on the bottom line.

Teekay Tankers currently sports a Zacks Rank #1. TNK’s shares have soared 160% in a year. Over the past 60 days, the Zacks Consensus Estimate for 2022 earnings has moved 87.6% north.


 

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