Since Southwest Airlines (LUV – Analyst Report) was last featured as the Bull of the Day on April 9, 2014, the stock has soared more than 40%.
Despite the huge run up in the stock price, shares still offer attractive upside potential.
The company delivered stellar second quarter results back in late July, prompting a flurry of positive estimate revisions from analysts. This sent to stock to a Zacks Rank #1 (Strong Buy). And based on current consensus estimates, shares trade at a reasonable 17x forward earnings, which is in-line with its historical median.
Southwest Airlines Co. is the nation’s largest carrier in terms of originating domestic passengers boarded. Including AirTran (which it acquired in 2011), it operates the largest fleet of Boeing aircraft in the world, serving 93 destinations across the United States and five near-international countries.
Second Quarter Results
Southwest Airlines delivered stellar second quarter results on July 24. Adjusted EPS came in at 70 cents, crushing the Zacks Consensus Estimate of 61 cents. It was a whopping 84% increase over the same quarter last year and marked the company’s 5th consecutive quarter of record profits.
Revenue rose 8% year-over-year to $5.011 billion, which also beat the consensus of $4.932 billion. Revenue passenger miles (paying passengers x distance traveled) increased 2.4%.
Meanwhile, the adjusted operating margin expanded to 16.3% in the quarter as the load factor (revenue passenger miles / available seat miles) increased 230 basis points to 83.9%.
Over the last 12 months, the company has generated a solid 17.1% pre-tax return on invested capital, which is above its 15% full year target.
Following the big Q2 beat, analysts revised their estimates significantly higher for Southwest. This sent the stock to a Zacks Rank of 1 (Strong Buy).
The current 2014 Zacks Consensus Estimate is $1.80, up from $1.49 ninety days ago. The 2015 consensus has risen from $1.75 to $2.10 over the same period.
You can see the sharp increase in estimates in the company’s “Price & Consensus” chart:
The stock price has also received some lift from the recent drop in oil prices.
While shares of Southwest has soared in 2014, the valuation picture still looks reasonable. The stock trades at 17x 12-month forward earnings, which is in-line with its 10-year historical median. The company’s enterprise value-to-cash flow ratio is around 12, which is a premium to its historical median of 10 but certainly not unreasonable given the strong growth projections for the company.
The Bottom Line
With strong earnings momentum, stellar growth projections, a history of profitability and reasonable valuation, shares of Southwest Airlines still offer attractive upside potential.