This airline beat Wall Street’s estimates by $0.03 last quarter. Analysts expect the company to grow by more than 16% annually over the next five years.
Southwest Airlines Co. (LUV)
From Sure Dividend
Southwest Airlines Co. (LUV) is the 2nd largest U.S. airline based on market cap, carrying more than 120 million passengers annually.
Second-quarter financial results. Revenue of $5.74 billion increased 0.2% from the same quarter a year ago. Despite higher fuel prices and the Flight 1380 incident, the company generated record earnings-per-share. More recently, Southwest Airlines reported (10/5/18) traffic figures for the month of September, which saw revenue passengers carried increase by 3.8%, revenue passenger miles increased by 5.3%, and available seat miles increased by 6.8%.
Southwest’s brand strength and focus on offering low fares have given the company a durable competitive advantage. It has remained profitable for 45 consecutive years. Southwest also has a very strong financial position for an airline. In 2017, the company’s credit rating was upgraded to A3 with Moody’s Investors Service, and BBB+ with Standard & Poor’s.
Southwest has positive growth potential moving forward through new technology and new routes. Last year, Southwest deployed a new reservation system. In May, Southwest announced plans to fly to Hawaii nonstop from California airports in Oakland, San Diego, San Jose, and Sacramento. It also plans to fly between the Hawaiian Islands, which is currently a high-priced market and is serviced by only Hawaiian Airlines. Overall, we expect 8% earnings growth for Southwest moving forward.
Using 2018 earnings-per-share estimates of $4.50, Southwest shares trade for a price-to-earnings ratio of 13.7. This is below our fair value estimate, which is a price-to-earnings ratio of 15.0.
With the dividend, we expect total returns of 11% per year for Southwest over the next five years.
Ben Reynolds, Sure Dividend, www.suredividend.com, ben@suredividend.com, October 2018