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Bear of the Day: Southwest Airlines (LUV)

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Southwest Airlines Co. (LUV - Free Report) is suffering from being in an out-of-favor industry. The full year estimates have been cut on this Zacks Rank #5 (Strong Sell).

Southwest Airlines operates a low cost airline in the United States and 10 other countries. Based in Dallas, it carries over 120 million passengers a year.

Met the Estimate in the First Quarter

On Apr 26, it reported its first quarter results and met the Zacks Consensus of $0.75.

Total operating revenue rose 1.9% to a first quarter record of $4.9 billion. First quarter operating revenue per available seat mile (RASM), an important airline metric, was comparable with the first quarter of 2017.

As demand for travel remains strong worldwide, the company saw a first quarter record load factor of 81.5%.

However, it does expect second quarter RASM to decrease in the 1 to 3% range year over year due to the recent softness in bookings following the Flight 1380 accident.

Second quarter fuel costs are expected at $2.20 per gallon, up from $1.99 in the second quarter of last year.

Thanks to revisions to its future fleet order book with Boeing, it raised its CAPEX to $2.0 to $2.1 billion, up from $1.9 billion.

New Hawaii Flights Coming

Southwest's announcement that it would push into Hawaii sent tremors through the industry as those are lucrative routes.

But due to the flight capability of its fleet, the impact will mainly be felt along the West Coast routes.

Southwest has announced that its inaugural flights will operate from Oakland, San Diego, San Jose and Sacramento. The flights will begin later this year.

Estimates Cut for 2018

Given the uncertainty moving forward with softer bookings, and higher than expected fuel costs, the analysts moved to cut 2018 estimates.

8 estimates were cut in the last month for 2018, pushing down the Zacks Consensus Estimate to $4.60 from $4.96. That's still a year-over-year earnings gain of 31% as the company made $3.50 in 2017.

The Zacks Rank, however, only cares that the estimates were cut and that a large number of analysts were all in agreement on cutting.

Still Shareholder Friendly

Southwest has always been shareholder friendly and it continues to be.

It has $3.2 billion in cash and short-term investments on hand as well as a fully available unsecured $1 billion revolving credit line.

Free cash flow in the first quarter was $708 million.

In the first quarter, it repurchased $500 million in stock and paid a dividend, which currently yields 0.9%.

There is still $850 million remaining under the May 2017 $2 billion share buyback program.

Is Southwest a Buying Opportunity?

Southwest shares have sunk about 21% in 2018 as investors have fled the airlines, in general.

The industry now ranks in the bottom 34% of the Zacks Industry Rank as well.

It now trades with a forward P/E of 11.5.

That seems really cheap, but the airlines have historically traded with single digit P/Es.

If you're interested in investing in the airlines, you might want to consider one with a higher Zacks Rank such as JetBlue Airways Corp. (JBLU - Free Report) or Delta (DAL - Free Report) . Both of them are Zacks Rank #3 (Hold) stocks.

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