A month has gone by since the last earnings report for Southwest Airlines Company LUV. Shares have added about 8.6% in that time frame, outperforming the market.
Will the recent positive trend continue leading up to the stock’s next earnings release, or is it 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 catalysts.
Fourth Quarter Earnings
Southwest Airlines' earnings per share (on an adjusted basis) of $0.74 beat the Zacks Consensus Estimate of $0.69. Operating revenues of $5,076 million edged past the Zacks Consensus Estimate of $5,025.3 million. Revenues increased 2% on a year-over-year basis. Passenger revenues accounted for the bulk (90.2%) of the top line.
Airline traffic, measured revenue passenger miles, which increased 5.5% year over year to 31.4 billion in the quarter under review. Capacity or available seat miles expanded (ASMs) 5% to 37.15 billion. Load factor (percentage of seats filled by passengers) came in at 84.4% compared with 85.1% in the year-ago quarter, as capacity expansion was outweighed by traffic growth. Passenger revenue per available seat mile (PRASM: a key measure of unit revenue) fell 3.3% year over year to 12.44 cents. In the reported quarter, revenue per available seat mile (RASM) was 13.66 cents, down 2.9% year over year.
Operating Expenses & Income
In the fourth quarter, operating income came in at $846 million as against $1 billion in the prior-year quarter. Excluding special items, operating income was $768 million, down 22.6%. Total adjusted operating expenses increased 8.7% year over year. Fuel price per gallon (inclusive of fuel tax: economic) climbed 2% year over year to $2.07. Consolidated unit cost or cost per available seat mile (CASM) – excluding fuel, oil and special items – increased 3.6% year over year to 8.81 cents.
At the end of 2016, Southwest Airlines had $3.4 billion in cash and cash equivalents of $1.68 billion compared with $1.58 billion at the end of 2015. As of Dec 31, 2016, the company had long-term debt (less current maturities) of $2.82billion as against $2.54 billion at the end of 2015. While the carrier generated free cash flow of $2.3billion in 2016, it returned $1.97 billion to shareholders through buybacks ($1.75 billion) and dividend payments ($222 million).
The carrier expects RASM to be flat to down at 1% in the first quarter of 2017 on a year-over-year basis. Unit costs – excluding fuel and oil expenses, special items and profit sharing expenses – are expected to increase in the band of 6% to 7% in the first quarter of 2017, mainly due to the recent labor deals inked by the company. The metric is expected to increase around 3% for full-year 2017.
How Have Estimates Been Moving Since Then?
Following the release, investors have witnessed an upward trend in fresh estimates. There have been three revisions higher for the current quarter.
Southwest Airlines Company Price and Consensus
Southwest Airlines Company Price and Consensus | Southwest Airlines Company Quote
At this time, Southwest Airlines' stock has a subpar Growth Score of 'D', though it is lagging a bit on the momentum front with an 'F'. However, the stock was allocated a grade of 'B' on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregte VGM Score of 'D'. If you aren't focused on one strategy, this score is the one you should be interested in.
The company's stock is suitable solely for value based on our styles scores.
Estimates have been trending upward for the stock. The magnitude of these revisions also looks promising. It comes with little surprise that the stock has a Zacks Rank #2 (Buy). We are expecting an above average return from the stock in the next few months.
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