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Southwest Airlines (LUV) Down 3.9% Since Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Southwest Airlines Co. (LUV - Free Report) . Shares lost about 3.9% in in that time frame.

Will the recent negative trend continue leading up to its next earnings release, or is LUV due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

First-Quarter Earnings

Southwest Airlines reported first-quarter 2018 earnings per share (excluding 4 cents from non-recurring items) of 75 cents, in line with the Zacks Consensus Estimate. The bottom line however, surged on a year-over-year basis.

Operating revenues of $4,944 million lagged the Zacks Consensus Estimate of $5,017.6 million. However, the top line improved year over year and was boosted by high passenger revenues accounting for bulk (92.7%) of the same.

Operating Statistics

Airline traffic, measured in revenue passenger miles, nudged up 3.7% year over year to 30.44 billion in the quarter under review. Capacity or available seat miles (ASMs) inched up 1.8% to 37.37 billion. Load factor (percentage of seats filled by passengers) came in at 81.5%, up 160 basis points on a year-over-year basis as traffic growth exceeded capacity expansion.

Passenger revenue per available seat mile (PRASM: a key measure of unit revenues) slid 1% to 12.27 cents. In the reported quarter, revenue per available seat mile (RASM) was flat year over year at 13.23 cents.

Operating Expenses & Income

In the first quarter, operating income (as reported) came in at $616 million compared with $606 million in the prior-year quarter. Excluding special items, the operating income was $584 million, up 1.7%. Total adjusted operating expenses (excluding profit sharing, fuel and oil expense plus special items) increased 1.4% year over year.

Fuel price per gallon (inclusive of fuel tax: economic) climbed 3% year over year to $2.09. Consolidated unit cost or cost per available seat mile (CASM) excluding fuel, oil and special items  dipped 0.3% year over year to 8.92 cents.

Liquidity

The company had cash and cash equivalents of $1,822 million at the end of the first quarter of 2018 compared with $1,495 million at the end of 2017. As of Mar 31, 2018, the company had a long-term debt (less current maturities) of $3,227 million compared with $3,320 million at 2017end.

While the carrier generated a cash flow of $708 million at the end of the first quarter, it returned $648 million to its shareholders through dividends and share repurchases.

Q2 & 2018 Guidance

For the second quarter of 2018, the carrier expects revenue per available seat mile (RASM) to decline between 1% and 3%. This dismal outlook is due to softness in bookings following the recent fatal incident at the carrier.
Second-quarter unit costs excluding fuel and oil expense and profit-sharing expense are estimated to increase 1-2%. Economic fuel costs are projected at $2.20 per gallon.

For 2018, the metric is anticipated to be flat compared with the 2017 figure. Previously, the metric was forecast to rise 2% year over year.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. There have been six revisions lower for the current quarter. In the past month, the consensus estimate has shifted downward by 10.9% due to these changes.

VGM Scores

At this time, LUV has an average Growth Score of C, though it is lagging a bit on the momentum front with a D. However, the stock was also allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Our style scores indicate that the stock is more suitable for value investors than growth investors.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise LUV has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.




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