Debt levels climbed as investors wondered if the industry would ever rebound. Southwest Airlines broke its decades-long run of profitability during the pandemic but was one of the first airlines to return to profitability in 2022. Its unique point-to-point model has helped to keep the airline running efficiently. This article will provide additional insights for investors wanting to buy Southwest Airlines stock.
Overview of Southwest Airlines
Although most of their flights are domestic, Southwest Airlines serves 121 airports across 11 countries (including Costa Rica and the Cayman Islands). The company has a market cap of $16.6 billion and employs nearly 67,000 people, making it the biggest firm in an airline tier known as low-cost carriers.
History of Southwest Airlines
As the world's largest low-cost airline carrier, Southwest Airlines Co. NYSE: LUV had humble beginnings as an in-state airline with three Boeing 737 plans servicing three routes in Texas.
Southwest Airlines was initially founded in 1966 by the charismatic visionary lawyer Herbert Kelleher and small carrier operator Rollin King in 1966. CEO Kelleher was famous for his chain smoking (up to 40 cigarettes a day) and whiskey-drinking outspoken persona, habitually breaking the rule book.
He became chairman and CEO after 1978. He was a disrupter who irritated the major carriers every chance he got as they opposed the low-cost carriers' foray into Texas.
After five years of legal battles with the incumbent airlines trying to prevent its entry into the Texas market, Kelleher elevated the battle to the Texas Supreme Court. The company officially changed its name to Southwest Airlines and took flight in 1971.
Southwest had just one class for passengers, no assigned seats, no meals and only flew Boeing 737 airplanes. Operating just one plane model kept maintenance costs low and turnaround times fast at 20 minutes. This enabled them to offer very low-priced tickets. Initially, Southwest Airlines only operated in Texas between three routes: Houston, San Antonio and Dallas.
Southwest Airlines continued to operate intrastate until 1979, when it expanded routes nationally to become a regional airline carrier. Kelleher had instilled a fun and supportive family-like culture with its employees. This ecosystem installed a loyal and dedicated workforce that was instrumental in growing it into a major airline carrier when its revenues surpassed $1 billion in 1989. Southwest Airlines has consistently ranked high among customer satisfaction surveys.
By 2019, Southwest Airlines grew its fleet to over 700 Boeing 737 planes flying to over 120 destinations in 11 countries, generating annual revenues north of $20 billion. Southwest Airlines is the only airline to report 47 consecutive years of profit until the COVID-19 pandemic shut down economies in 2020.
The pandemic brought the airline industry down to its knees. Southwest Airlines could weather COVID-19 better than its competitors and navigate a recovery faster upon reopening. Much of the existing operating model and strategic decisions enabled Southwest Airlines to fare better than competitors.
Southwest Airlines had a solid balance sheet as it was highly profitable ahead of the crisis, and its low-cost operating strategy kept the company buoyant as travel demand vaporized. Since it had few international flights and no business class, it didn't suffer the fallout from international travel bans like the major carriers.
Southwest Airlines' point-to-point model has helped keep it agile with changing demand patterns. The company continued to stress operational efficiency and low costs, highlighting its no-cost flight changes and no baggage fee perks to passengers. Southwest Airlines has emerged from the pandemic, with revenues rebounding past pre-COVID levels.
Profitability has been inconsistent due to inflationary pressures and customer expense reimbursements over operational disruptions during the 2022 holiday season. However, the company has the lowest debt among the four major airline carriers at $8 billion, with liquidity of $12.7 billion. Southwest Airlines should continue to recover with the travel and leisure rebound as consumers shift discretionary spending from products to services.
Financial health check: Why Southwest stands out
Southwest Airlines' recovery from the COVID-19 pandemic was the envy of the industry. The business was a nightmare in 2020 or 2021, but Southwest Airlines returned to profitability in Q4 2021 and has posted positive EPS figures in five of the last eight quarters.
However, the stock is more expensive than its peers (37.24 P/E ratio), and its price performance has suffered since mid-2021 despite a return to profitability. MarketBeat is currently tracking 17 analysts covering Southwest Airlines stock; the average rating is "hold," and the number of "buy" ratings has declined from eight to four in the last year. The financial data may improve, but Southwest Airlines investors have not yet seen rewards.
Competitive advantage in a volatile market
Southwest Airlines is a low-cost carrier, the middle tier amongst public airline companies. Legacy carriers like Delta Airlines Inc. NYSE: DAL and United Airlines Holdings Inc. NASDAQ: UAL have domestic and international flights, large fleets and vast arrays of class offerings.
At the other end of the spectrum are ultra-low-cost carriers like Spirit Airlines Inc. NYSE: SAVE, which pare down services and locations to provide the cheapest possible flights.
Southwest Airlines competes directly with airlines like JetBlue Airways Corp. NASDAQ: JBLU and Ryanair Holdings NASDAQ: RYAAY as a low-cost carrier. Southwest Airlines is one of the few non-major carriers to offer a rewards program, and its point-to-point system aims to increase efficiency by reducing wait times and getting more customers through the gates. Southwest Airlines has long been an airline innovator, and its lobbying efforts have been well-publicized.
Growth opportunities and expansion plans
Southwest Airlines recently made headlines by reaching a deal with its pilot labor union. Although the agreement terms weren’t disclosed, pilots at the four other major airlines reached agreements for significant raises over the next five years. Southwest Airlines pilots likely demand similar benefits. How increased labor costs will affect Southwest Airlines' bottom line remains to be seen, but crashing oil prices are a tailwind for all airlines in 2024.
Is Southwest Airlines undervalued or overvalued?
Southwest Airlines is historically undervalued based on its forward price-earnings (P/E) ratio of 10.85, trailing P/E at $36.36. This is likely due to the recent quarterly losses from higher labor wages and inflation. The rising labor costs result from contract renegotiations with various airline workers. Labor unions are something that all airlines have had to settle on, so it doesn't just affect Southwest Airlines.
Inflation decreased from 9.1% in June 2022 to 3.1% by December 2023. The monthly stochastic has fallen under the 20-band, the oversold level. Southwest Airlines stock appears undervalued. Remember, undervalued stocks can continue to become more undervalued and oversold, so be cautious even if LUV stock looks to be good value.
How to buy Southwest Airlines
Here are the five steps to buy Southwest Airlines stock, an NYSE-listed company with the LUV stock symbol.
Step 1: Open a brokerage account.
To buy LUV stock, you will need to have a brokerage account. It can be an online or app-based account with zero commission trades or through a full-service broker that will assign you a registered investment advisor.
Zero-commission brokerages are a more do-it-yourself (DIY) platform versus full-service brokers. Many full-service brokers are also zero-commission but may charge a fee based on your assets in the account. You will also have to decide whether to have a margin account, which enables you to leverage buying power on a two-for-one basis for overnight and swing trades, or a cash account. It's crucial to stay within the budget when you use margin and remember that you are paying margin interest when it's used.
Step 2: Do your research.
Research is the key when investing in the stock market. MarketBeat provides excellent resources for performing research. Just type the symbol for LUV stock in the search tab for information on Southwest Airlines.
To delve into more detailed information like earnings or analyst ratings for LUV stock on MarketBeat:
- Click on the respective tab located above the MarketRank™ forecast.
- Work your way through the tabs to get a good foundation of knowledge on Southwest Airlines.
- Read Southwest Airlines' latest earnings report, conference call information, and headlines. It helps to make a checklist of positives like EPS and revenue year-over-year (YoY) growth and negatives like a lowered reverse guidance.
Solid fundamental research is vital in determining your actions on Southwest Airlines stock buy or sell. It's always prudent to compare LUV stock fundamentals to peers in the industry and other blue chip stocks if you are familiar with blue chip stocks.
Step 3: Plan your trade.
Use technical analysis to help plan your trade. Look at the daily, weekly and monthly candlestick charts to gauge Southwest Airlines shares' trend, price support and resistance levels.
You can also use a momentum indicator like a stochastic or a MACD histogram to gauge whether LUV stock is in the overbought and oversold area. Perform technical analysis to predetermine your entry price range and exit price ranges. Entries should be near support levels or at breakout levels. Exits are upside price targets and downside stop-loss levels.
Be careful not to chase the entries and be aware of reversal patterns like market structure low and high triggers. Once you've determined your Southwest Airlines entry and exit price levels, scale into the position with several entries at different prices or buy in one entry. Make sure not to overleverage yourself and take too much LUV stock.
Step 4: Place your trade.
Log into your brokerage account. Determine the Southwest Airlines buy limit price levels, number of shares and place your trade. Patience is a virtue, so consider a limit order instead of a market order.
However, if you know how to buy Southwest Airlines stock and prefer to get in at the market price, go for the market order and buy shares. Once you've gotten into a position, it's essential not to forget about it but to manage the LUV stock position.
Step 5: Manage your investment.
Remember your Southwest Airlines upside price target(s) and downside stop loss prices? Ensure you diligently exit some or all of your stock if and when those price levels hit. Being aware of Southwest Airlines earnings report dates and staying abreast of important press releases and events is also prudent. Investing is not a set-it-and-forget-it activity, especially when you own individual stocks. To diversify your portfolio further, consider looking at the best defense stocks on MarketBeat.
Investor-friendly policies and shareholder value
Southwest Airlines stock has been through many structural events regarding its shares. Here's a list to be aware of:
Stock split
A stock split is an action determined by the board of directors to uniformly increase the outstanding shares by dividing a single share of stock into multiple pieces. In most cases, it makes shares more accessible to more shareholders since the price may be too high.
For example, a two-for-one stock split would split one $100 stock into two shares of $50. The value remains the same, but the price splits between the pieces. It's like taking a pizza with eight slices and cutting it into 16. When there are more slices, it's still the same net amount of pizza. Southwest Airlines has had 14 stock splits since 1977 in various ratios from two-for-one to five-for-four. Its most recent stock split was a two-for-one split on January 18, 2001.
Share volatility
Southwest Airlines shares have a beta of 1.19, implying moderate volatility. The beta determines how the security moves compared to stock market benchmark index changes. The beta for the S&P 500 is 1. If a stock has a beta of 2, it tends to move twice the percentage amount of the S&P 500.
For example, if the S&P 500 is up 10% for the year, a stock with a beta of 2 would be up 20%. That also applies to losses. Higher beta stocks are riskier, with more volatility by nature. Stocks with a beta of less than 1 move fractionally compared to the S&P 500. If you accept more volatility for more upside potential, look at the best aerospace stocks on MarketBeat.
Southwest Airlines stock has had a 5-year performance of down (45%). Its lifetime performance is up 506% since it went public on the New York Stock Exchange on June 8, 1971. LUV stock has a one-year trading performance of down (18%). Southwest Airlines quickly recovered from COVID, but the stock price has been in a downtrend for most of the last two years.
Dividend payouts
Southwest Airlines suspended its dividend payments after Q1 2020 as the pandemic shut down most air travel nationwide. Before this, Southwest Airlines had steadily increased its annual payouts and reinstated its dividend in December of 2022.
The payout of 18 cents per share has remained unchanged since Q1 2019, and the current payout ratio of 96% indicates another raise in the short term might be challenging to achieve for LUV stock. Ensure you buy shares before the ex-dividend date to entitle yourself to the quarterly cash dividend payout.
Is it a good time to buy Southwest Airlines stock?
Whether it's an excellent time to buy Southwest Airlines stock depends on your entry price, risk profile and investment holding time horizon. While past performance doesn't guarantee future results, a long-term holding period can smooth out the price fluctuations, especially considering dollar cost averaging.
Southwest Airlines is oversold on the monthly candlestick chart, but it has been a downtrend since peaking at $64.65 in April 2021. Remember that the pandemic low hit $22.47 in March 2020. If you are interested in the industry beyond LUV stock, look at MarketBeat's airline stocks list.
Point-to-point flight model
One of the most unique aspects of Southwest Airlines is its point-to-point flight model versus the traditional hub-and-spoke flight model used by other major airline carriers. Point-to-point enables carriers like Southwest Airlines. to be more agile and shift capacity and resources with changing demand patterns. The planes are all Boeing 737 planes that the pilots, flight, maintenance, and crew are intimately familiar with. Southwest Airlines also implements a rolling hub model in its base cities.
FAQs
Here are some answers to frequently asked questions about Southwest Airlines stock.
Is Southwest Airlines stock a good stock to buy?
Deciding on a Southwest Airlines stock buy doesn't have to be complicated. It can be an excellent stock if you have a long-term horizon and consider a dollar-cost-averaging strategy in a diversified portfolio. The basic rule: Don't put all your eggs into one basket. That means spreading your investment capital across many holdings and assets, not just LUV stock.
How high will Southwest Airlines' stock go?
The sky's the limit — pun intended. Southwest Airlines' stock price growth depends on its future revenue, earnings growth and macroeconomic backdrop. The travel and leisure sector has been recovering during a normalization process after the pandemic. If you want more volatility, get aggressive with defense stocks on MarketBeat.
How do you invest in Southwest Airlines stock?
You can invest in Southwest Airlines' stock by buying shares through your broker. Consider purchasing on pullbacks with a long-term investment time frame. Dollar-cost averaging can help to attain a better average cost basis. Remain prudent and stay on top of Southwest Airlines earnings reports and material press releases.
Before you consider Southwest Airlines, you'll want to hear this.
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