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Southwest (LUV) Gains 42% in Six Months Despite Coronavirus Woes
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Southwest Airlines Co. (LUV - Free Report) continues to grapple with weak passenger revenues due to coronavirus-led travel demand woes. However, its shares have rallied 42% in the last six months on the back of some key positives.
Reasons Behind the Price Surge
Amid coronavirus-led challenges, low fuel prices are providing a cushion to Southwest. This is because fuel expenses comprise a major chunk of airline expenditures. During the third quarter, fuel costs per gallon (inclusive of fuel tax: economic) declined 40.6% year over year to $1.23. The same is expected to drop in the fourth quarter as well. The company estimates fuel price to be in the range of $1.2-$1.3 per gallon in the ongoing quarter compared with $2.09 in the year-ago period.
Southwest’s cost-cutting measures to mitigate the effects of weak travel demand have also boosted shares of the company. During the third quarter, the company realized cost savings of $143 million from voluntary separations and extended time-off programs for its employees. With reduced workforce, the airline anticipates salaries, wages and benefit cost savings of more than $400 million in the fourth quarter. Additionally, Southwest forecasts operating expenses, excluding fuel and oil expenses, special items and profit-sharing expenses, to drop 20-25% year over year in the current quarter.
Thanks to cost-control measures, Southwest’s cash burn is improving. The carrier’s third-quarter cash burn was $16 million per day, which is an improvement from $23 million in the second quarter. For the fourth quarter, Southwest anticipates cash burn to be $10 million-$11 million per day, compared with the previous estimate of $11 million. Improving cash burn is another factor which we believe drove shares of the company.
With the economy gradually picking pace and travel restrictions easing, Southwest’s initiatives to expand operations is also encouraging. Effective Nov 15, the carrier began services connecting Miami, FL with Tampa, FL; Baltimore /Washington; Houston (Hobby) and Chicago (Midway). Moreover, Southwest resumed all of its California-Hawaii routes, except for Oakland and San Jose, CA to Kona, in November. Effective Dec 1, 2020, Southwest will start selling all available seats for flying.
Lastly, we believe Southwest’s sound liquidity position has helped its shares hold up well. At the end of the third quarter, the carrier’s cash and cash equivalents stood at $14,562 million, much higher than the current debt of $720 million, implying that the company has sufficient cash to meet its current debt obligations. Moreover, the company’s current ratio of 2.07 compares favorably with the industry’s average of 1.01. Owing to constant efforts to preserve cash and bolster liquidity, the carrier is confident that it does not have to participate in the non-binding loan program of approximately $2.8 billion, which the company signed with the U.S. Treasury Department. Instead, it feels, if needed it can secure additional financing at better terms.
Shares of Landstar, FedEx and GATX have gained more than 14%, 100% and 31% in the last six months respectively.
The Hottest Tech Mega-Trend of All
Last year, it generated $24 billion in global revenues. By 2020, it's predicted to blast through the roof to $77.6 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.
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Southwest (LUV) Gains 42% in Six Months Despite Coronavirus Woes
Southwest Airlines Co. (LUV - Free Report) continues to grapple with weak passenger revenues due to coronavirus-led travel demand woes. However, its shares have rallied 42% in the last six months on the back of some key positives.
Reasons Behind the Price Surge
Amid coronavirus-led challenges, low fuel prices are providing a cushion to Southwest. This is because fuel expenses comprise a major chunk of airline expenditures. During the third quarter, fuel costs per gallon (inclusive of fuel tax: economic) declined 40.6% year over year to $1.23. The same is expected to drop in the fourth quarter as well. The company estimates fuel price to be in the range of $1.2-$1.3 per gallon in the ongoing quarter compared with $2.09 in the year-ago period.
Southwest’s cost-cutting measures to mitigate the effects of weak travel demand have also boosted shares of the company. During the third quarter, the company realized cost savings of $143 million from voluntary separations and extended time-off programs for its employees. With reduced workforce, the airline anticipates salaries, wages and benefit cost savings of more than $400 million in the fourth quarter. Additionally, Southwest forecasts operating expenses, excluding fuel and oil expenses, special items and profit-sharing expenses, to drop 20-25% year over year in the current quarter.
Thanks to cost-control measures, Southwest’s cash burn is improving. The carrier’s third-quarter cash burn was $16 million per day, which is an improvement from $23 million in the second quarter. For the fourth quarter, Southwest anticipates cash burn to be $10 million-$11 million per day, compared with the previous estimate of $11 million. Improving cash burn is another factor which we believe drove shares of the company.
With the economy gradually picking pace and travel restrictions easing, Southwest’s initiatives to expand operations is also encouraging. Effective Nov 15, the carrier began services connecting Miami, FL with Tampa, FL; Baltimore /Washington; Houston (Hobby) and Chicago (Midway). Moreover, Southwest resumed all of its California-Hawaii routes, except for Oakland and San Jose, CA to Kona, in November. Effective Dec 1, 2020, Southwest will start selling all available seats for flying.
Lastly, we believe Southwest’s sound liquidity position has helped its shares hold up well. At the end of the third quarter, the carrier’s cash and cash equivalents stood at $14,562 million, much higher than the current debt of $720 million, implying that the company has sufficient cash to meet its current debt obligations. Moreover, the company’s current ratio of 2.07 compares favorably with the industry’s average of 1.01. Owing to constant efforts to preserve cash and bolster liquidity, the carrier is confident that it does not have to participate in the non-binding loan program of approximately $2.8 billion, which the company signed with the U.S. Treasury Department. Instead, it feels, if needed it can secure additional financing at better terms.
Zacks Rank & Key Picks
Southwest carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader Transportation sector are Landstar System, Inc. (LSTR - Free Report) , FedEx Corporation (FDX - Free Report) and GATX Corporation (GATX - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Shares of Landstar, FedEx and GATX have gained more than 14%, 100% and 31% in the last six months respectively.
The Hottest Tech Mega-Trend of All
Last year, it generated $24 billion in global revenues. By 2020, it's predicted to blast through the roof to $77.6 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.
See Zacks' 3 Best Stocks to Play This Trend >>