Will Southwest Airlines' Stock Fly?

Southwest Airlines (LUV) announced first quarter ended March 31, 2016 total operating revenue of $4.8 billion, up 9.3 percent year-over-year from $4.4 billion during the same period last year.

Southwest Airlines declared first quarter of 2016 non-GAAP operating income of $952 million or $0.88 per diluted share, up 23.6 percent year-over-year from $770 million or $0.66 per diluted share in first quarter of 2015.

The key airlines company reported continued year-over-year expansion in both its top and bottom lines primarily driven by an impressive 9.2 percent growth in the company’s available seat mile despite stage length growth.

Importantly, Southwest illustrated a significant 33.4 percent of adjusted return on invested capital (ROIC) for the year ended March 31, 2016 as against 25.6 percent for the year ended March 31, 2015.

In addition, the airlines major delivered an attractive $1.2 billion of first quarter free cash flows and returned a consolidated $596 million to the key stakeholders in the form of dividends and planned share buybacks.

Moving ahead, Southwest seems to be keenly focused on delivering attractive shareholder returns through strategic share repurchases while offering an impressive return on invested capital to the key stakeholders which is in line with its continued commitment to returning a majority of the invested capital to its shareholders.

Focus on fundamentals 

Southwest is dedicated to preserving the robustness of its balance sheet and generating impressive free cash flows while offering notable shareholder value.
The company has nearly $3.1 billion of unrestricted key cash flows as well as short-term investments along with a significant $1 billion of completely undrawn and accessible credit line facility. Southwest generated about $3.2 billion worth of operating cash flows coupled with significantly controlled $2.0 billion of core capital expenditures. Debt repayments were restricted to $213 million with a superior 33% leverage available to the balance sheet which has provided an investment grade credit rating to the company by all major credit rating agencies. Importantly, Southwest has returned nearly $1.4 billion to the key stakeholders.

The key airlines company is believed to be the only domestic airlines major with investment grade credit ratings from all the three key rating agencies. Further, Southwest has remarkable viability record with 43 successive years of profitability. Also, the airlines company is honored with being among the Fortune’s 2016 globally most esteemed companies.

The impressive cash flow generation capability of Southwest Airlines has primarily encouraged it to return a majority of the invested capital to key shareholders in the form of dividends and strategic share repurchases which are again in line with its continued commitment to offer attractive investor returns.

Smart moves

Southwest is believed to be the country’s major domestic airlines with the company’s market share remaining robust, particularly in its best 100 O&D city pairs and representing 24% of overall domestic market share, serving 24 of the key 25 U.S. metro regions, serving 94 of the major 100 domestic O&D city pairs that includes co-terminal airports with 79 on a constant service. Southwest has 69% of total market share in its major 100 O&D city pairs including, holding the number one spot in market share in 49 of its 86 domestic airports and capturing the top spot in market share among 91 of its major 100 O&D city pairs. Also, Southwest has a leading market share among several large metro cities.

The airlines company has strategically maintained a competitively smaller cost structure that allows it to sustain its minor fare band and much lower than the industry’s average cost structure. Moreover, Southwest has uniquely implemented a superior fuel hedging strategy that has allowed it to deliver $2.0 billion of strategic economic fuel savings since the fiscal year 2000. In addition, the company has uniquely recognized nearly 50 likely new markets, typically past the Lower 48.

The attractively lower cost structure of Southwest Airlines and significantly large global market share enables it to deliver impressive top line growth while offering attractive shareholder returns. The airlines company is also uniquely traversing through the weaker global commodity demand and pricing environment by adopting a tactical jet fuel hedging strategy.


Overall, the investors are advised to “Buy” equity in Southwest Airlines Co. considering the company’s solid total cash position of $3.05 billion, encouraging the company to make future growth investments. The profit margin of 11.10% seems attractive. However, the PEG ratio of 0.58 signifies weaker company growth and comparable to the industry’s growth average of 0.57.
Published on May 3, 2016
By Vinay Singh

Copyrighted 2016. Content published with author's permission.

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