OK, So we are deep into the current $300 million Accelerated Stock Repurchase program, taking place over this 16 trading day period (May 14 thru June 4). Four of those days were in the $40 to $42 trading range, while the rest, so far, are basically in the $38 to $36 trading range. There are five trading days left to complete the program. What does this mean?
Compared to their last ASR program completed in March 2015 at $43, if LUV's stock can hopefully continue to trade in this average of $37 for the next five days, LUV has just been given half of one 737-800 for free. That's right. They saved approximately $40 million dollars on this current ASR program, as compared to the previous March program. AND, I believe when the Board authorized the current ASR before May's annual meeting, they expected to pay prices at an average above $43.
Sooooo... Let's hope the stock continues to trade between $36 and $38 for the next five days, as this has been kind of a neat gift for all of us shareholders. We are five days away from having only 660 million shares outstanding, down from 820.
Typically with these "Accelerated Stock Repurchase" contracts, the bank buys about 300,000 shares per day. Since the latest ASR has only 16 trading days (starting May 14), I suspect they are currently buying about 500,000 shares per day. Would they buy it all on Tuesday as you suggested? No. They are limited.
I do not share your idea that "LUV is in the dumps", except technically. Fundamentally, Tammy revealed last week that LUV's demand at DC, NY, Dallas, and coming Houston had basically "forced" LUV to increase their capacity. This was actually a bullish revelation that the "Street" took negatively because of the Street's "fear" of "capacity competition". However, technically the stock needs to heal. Hopefully that will take a little while so that LUV might be able to not only complete the current ASR program, but perhaps start on another... at prices below $43.
Why $43? Because we know that LUV had previously, in March of this year, bought 7 million shares at an average of $43. So, it is my logic that they will continue "accelerated" buys below $43. I mean, what has changed, except they have delivered another 6 seven-seventeens to Delta, and the price of oil has wiggled a touch. (Note: Didn't DAL increase their capacity by taking the seven seventeens? No, they had a similar problem. The tech industry was expanding away from San Jose and they need bigger jets.) There is just natural growth going on here...
With oil at $60, LUV is still trading at a 10 price/earnings multiple going forward, which is still historically low for LUV.
Great that we are having this dip, as LUV had only 16 trading days to complete the current authorized stock repurchase of $300 million of its own stock (This purchase is to take place between May 14 and June 4). That will leave $1.2 billion of the current total authorization yet to go. Note: Since they bought $300 million from a prior authorization in the Feb/Mar period at an average of $43 per share, you can rest assured that once this current $300 million block is delivered to Treasury on June 4, and the stock is hopefully still below $43, they will initiate another $300 million block.
So how is this stock repurchase by the company going? Well, in November of 2011, when they first started aggressively buying their stock for Treasury, they had 820 million shares outstanding. At the completion of the current $1.2 billion remaining authorization, they will have 630 million shares outstanding. That means that the company has actually bought 23% of itself.
Plus, if you make the past time = zero, they bought the stock for free. In other words, they currently have basically the same balance sheet (the amount of cash and debt) they had in 2011, yet they will have 190 million less shares outstanding... AND they now have new NY gates, Dallas, Houston (soon), new DC gates, Atlanta (the #1 airport in the USA), International flights, and sharply more jets...
Still has my interest. Hopefully it will stay down a bit to allow the completion of a couple of these $300 million blocks.
8) The price of oil: Listening to the last analysts/bank conference, LUV's CFO mentions that with oil at $50, LUV will save $500 million this quarter. Since that call, the price of oil has decreased to $43, but now has jumped to back $47. It is still below $50, but let's look at $50 oil for a minute. The poled 18 analysts have this quarter estimated at a first quarter record of $0.64, up from last year's $0.18. A saving of $500 million works out to about 45 cents per share, after taxes. 18 cents (if identical to last year) plus 45 cents savings comes out to 63 cents for the quarter.
That 63 cents earnings projection assumes that this quarter will be nearly identical to last year's first quarter. However, there are some positive situations which, in all fairness, should be added in:
A) "New" Dallas... It's kind of like LUV just picked up a new major city... and they dominate Dallas.
B) New York and Washington added slots.
C) The completed digestion of AirTran; finished just before this current quarter started.
D) Already reported increase in LUV passenger numbers for Jan and Feb 2015
E) The company's purchase of $1.3 billion worth of LUV shares (since 3/2014) which have been taken off the Market, which will increase the earnings per share, EVEN if the revenues did not increase for 2014.
The savings of A through E above should make the poled analysts projection possibly conservative. Meanwhile the price action pauses to refresh.
So here are some comparative reasons for LUV continuing its three year price uptrend:
1) Different than the other airlines which have also risen like amounts (i.e. ALK, SAVE, DAL), three years ago LUV acquired AirTran , which it has now digested. The synergies of this digestion have yet to add to LUV, comparatively. Think about it: AirTran increased LUV's size by 25%. This year LUV will fine tune the LUV/AirTran combination. Their Point to Point strategy is a tremendous advantage in "fine tuning."
2) LUV has bought 20% of their stock, including the recent Feb 7 million share purchase right in the current price range. Remember, in 2011 they had 823 million shares outstanding, very similar to DAL. Not today. At the beginning of March they received 75% of the late February Accelerated Stock Repurchase plan for $300 million. They mentioned they intend to buy another $80 million of stock before the annual meeting. This sets up for another $1 billion authorization, come May. LUV, if you step back a second, is kind of buying itself, pushing for a 25% total buy back, as this continues. What other airline has done that?
3) Obviously, June will hold a dividend increase, as they have hinted at this in their recent CCs.
4) Dallas? We liked Dallas. Now comes Houston and LUV's slow walk into large International travel expansion. Central America is rated as the fastest growing Air Travel market in the world... And there is LUV with practically their own International airport.... Houston. LUV has mentioned 50 new International targets. 50....
5) S&P leader one year = share price increase in future years. And for good reasons. see Cramer.
6) Finally, LUV returns to their one jet strategy. They passed off the smaller AirTran jets to DAL. And, they are painting their new colors on their fleet, as I type this. A bold statement: "We have arrived!"
7) USA domestic travel continues to expand, for various reasons. LUV is THE domestic carrier.