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Southwest Airlines (LUV) Gains 21% in 3 Months: Here's Why

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Shares of Southwest Airlines Co. (LUV - Free Report) have gained 21% in the past three months, outperforming its industry's 3.8% growth.

Three-Month Price Performance

Why the Impressive Price Performance?

While releasing its August traffic report, this Dallas-based company issued an improved third-quarter unit revenue view on the back of solid demand for air travel. Detailed results should be out on Oct 25.

Southwest Airlines expects passenger revenues to be strong owing to impressive bookings and close-in yield trends. The carrier anticipates third-quarter revenue per available seat mile (RASM: a key measure of unit revenues) to be aided between 0.5 and 1 point year over year due to flight cancellations in July and August, following weather-related disruptions. Combing all these factors, the company now envisions RASM to increase 1-1.5% year over year. Earlier view was a year-over-year change between -1% and 1%.

We are also appreciative of the company's efforts to reward shareholders through dividends and share buybacks. During the first half of the year, the company returned $1.2 billion to its shareholders through buybacks ($1 billion, inclusive of the $500 million accelerated share repurchase launched in April) and dividends ($240 million). In May, the carrier hiked its quarterly dividend by 28% to 16 cents per share.  Moreover, its board had cleared a new buyback program worth $2 billion.

Southwest Airlines' employee-friendly approach is encouraging as well. Moreover, the carrier's efforts to expand its operations and modernize its fleet are commendable. To this end, the carrier announced in September that it will launch additional routes during spring next year to meet surge in demand. The carrier has also decided to revive seasonal service on some routes.

Additionally, the new tax law, which reduces corporate tax rate significantly, is a huge positive for Southwest Airlines.

Zacks Rank & Key Picks

Southwest Airlines carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader Transportation Sector are Norfolk Southern Corporation (NSC - Free Report) , Trinity Industries, Inc. (TRN - Free Report) and ArcBest Corporation (ARCB - Free Report) . While Norfolk Southern and Trinity Industries carry a Zacks Rank #2 (Buy), ArcBest sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Shares of Norfolk Southern, Trinity Industries and ArcBest have gained 34%, 15.1% and 44.2%, respectively, in the last six months. 

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