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Southwest (LUV) Up 2% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

It has been about a month since the last earnings report for Southwest Airlines (LUV). Shares have added about 2% in that time frame, outperforming the S&P 500.

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

Earnings Miss at Southwest Airlines in Q4

Southwest Airlines' earnings per share of 98 cents missed the Zacks Consensus Estimate of $1.11. Moreover, the bottom line declined 16.2% year over year due to higher costs from the MAX groundings.

Meanwhile, operating revenues of $5,729 million surpassed the Zacks Consensus Estimate of $5,719 million. The top line also inched up marginally. However, passenger revenues accounting for bulk (92.8%) of the top line dipped slightly year over year.

Operating Statistics

Airline traffic, measured in revenue passenger miles, dipped 1.5% year over year to 33.22 billion in the quarter under review. Also, capacity or available seat miles (ASMs) slipped 0.9% to 40 billion due to the MAX groundings. Load factor (percentage of seats filled by passengers) came in at 83.1%, down 40 basis points on a year-over-year basis as traffic decline was more than the capacity contraction.

Passenger revenue per available seat mile (PRASM: a key measure of unit revenues) inched up 0.8% to 13.28 cents. Moreover, in the reported quarter, revenue per available seat mile (RASM) rose 1.3% year over year to 14.32 cents owing to 1.5% increase in passenger revenue yield.

Operating Expenses & Income

In the fourth quarter, operating income (excluding special items) totaled $665 million compared with $820 million in the year-earlier period. The Boeing 737 MAX 8 grounding affected operating income to the tune of $313 million in the period and $828 million in 2019.

The company expects the adversity to persist in 2020. Further, total adjusted operating expenses (excluding profit sharing, fuel and oil expense plus special items) climbed 4.1% year over year. The increase in costs was due to the groundings and the resultant lower capacity during the quarter.

Fuel price per gallon (inclusive of fuel tax: economic) was down 7.1% year over year to $2.09. However, with the company’s most fuel-efficient aircraft being grounded, its fuel efficiency slid 0.8% in the fourth quarter. Additionally, consolidated unit cost or cost per available seat mile (CASM) excluding fuel, oil and special items increased 8.2% year over year to 9.9 cents. The Boeing 737 MAX groundings pushed up costs.

Liquidity

The company had cash and cash equivalents of $2,548 million at the end of the fourth quarter compared with $1,854 million at the end of 2018. As of Dec 31, 2019, the company had long-term debt (less current maturities) of $1,846 million compared with $2,771 million at 2018 end.


Q1 & 2020 Outlook

Southwest anticipates RASM to increase 3.5-5.5% year over year in the first quarter of 2020. Lower capacity due to removal of the MAX flights among other factors is likely to positively impact this metric. Economic fuel costs are envisioned in the range of $2.05-$2.15 per gallon compared with $2.05 reported in the first quarter of 2019. Capacity is expected to decrease 1.5-2.5% year over year. Fuel efficiency is estimated to slip 2-3% in the current quarter.

CASM excluding fuel and oil expense and profitsharing expense is predicted to increase 6-8% year over year in the first quarter. The forecast includes a seven-point negativity due to lower capacity from the Boeing MAX groundings. Higher expenses on salaries, wages and benefits as well as maintenance also weighed on the view.

Additionally, 2020 fuel costs are estimated in the band of $2-$2.10 per gallon. Capital expenditures are estimated between $1.4 billion and $1.5 billion in the ongoing year.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision flatlined during the past month. The consensus estimate has shifted 8.31% due to these changes.

VGM Scores

Currently, Southwest has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the second 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.

Outlook

Southwest has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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