Let’s take a look at these givens:
1) For the past ten years, LUV has been basically trading at $16, with highs in the $23s.
2) For the past ten years, ALK has moved up from $10 to $85 and now has analysts pointing to $100.
3) For the past 6 years DAL has moved up from $5 to $33 and now has analysts targeting $40.
4) Two years ago, LUV bought AirTran for LUV’s stock and cash. Since that time, LUV has bought back the stock it gave out for the acquisition for a profit of $150 million. It also has since earned the cash paid for the acquisition and the cash used to purchase back the stock issued for the acquisition. In other words, LUV has expanded 25% for roughly no change in its 3 year ago balance sheet.
5) This is the last year of digesting AirTran. The return of each LUV/AirTran jet seat has dipped while this digestion has taken place, holding LUV's stock in check.
OK… Notice that both ALK and DAL have more debt per jet seat than LUV. Notice that LUV is the only carrier with only one jet type (after the end of this year), thus having economies of scale come into play no other airline has. Given the price of jets, debt, and competition, the return on seats should be similar for each airline, as it was in the past. (Jet seats on LUV, ALK and DAL prior to the AirTran acquisition basically all had roughly the same return based on capitalization and debt. But now???)
Question: Can you, without even doing the math, feel that LUV now has a discounted capitalization as compared to where it should be relative to the other airlines? …ALK and DAL, now at a multiple into new highs, vs LUV not even in new highs… Interesting?
Soon LUV will be at $23 and Merrill will raise again. JP Morgan, hopefully will remain low, for we need a negative guy to help LUV continue to buy cheap stock for Treasury. Just wait 'till 2015, kids.