Southwest Shares Flying High

It will take a long time to undo the damage of the coronavirus pandemic, but Southwest Airlines (NYSE: LUV) are working hard to do it. Shares are already up 50% in the last two weeks from the lows and look ready to take on the range that they had steadied into in March before the second dip took them down lower this month.

Although shares are still down 40% from pre-crash levels, this is actually a victory for Southwest in the broader scheme of things. To put that in some context, the stocks of the three other major airlines, Delta (NYSE: DA), American (NASDAQ: AAL) and United (NASDAQ: UAL), are all down 60% in the same time period.

Best of the Bunch

It’s been a good week so far for Southwest who jumped 12% in Tuesday’s session after the long weekend and were up another 3.5% on Wednesday. This latest pop comes after UBS upgraded the world’s largest low-cost carrier from a Neutral to a Buy and raised its price target from $37 to $41. This would entail about a 20% rally in the shares which we know is very doable. They’re basing the $41 figure on a 7x earnings multiple and 12x price-to-earnings multiples which the company has historically traded around.

Fundamentally, this was the big driver for the upgrade on the whole as Southwest’s valuation remains the pick of the airline bunch. In a note to clients, analyst Myles Walton said "unlike many other airlines, the balance sheet position of LUV is remarkably clean (near-net cash balance sheet), which provides protection from any step backward in demand under another wave of COVID-19. We believe that there is a risk that by getting specific federal assistance there will be a heightened regulatory risk on US airline business models into 2021 and beyond; however, assuming regulations are evenly applied, LUV could be a net beneficiary on any 'stress testing' of financials."

Earlier this month, Bank of America was out with a similar note and similar sentiments. They see Southwest paying down its debt faster than its peers believe it’s more suited for organic growth and that it can boast the best balance sheet of all the majors.

Momentum Shifting

At a time when Boeing’s (NYSE: BA) CEO is saying he expects a major airline to go under in 2020, these upgrades and comments and jump in share price will be a welcome reprieve for Southwest investors because the future is still fairly bleak for the industry. Dave Calhoun, head of Boeing, forecasted air traffic levels to still be below 25% in September and maybe around 50% come December, in an interview earlier this month.

That being said, there are signs that things are going in the right direction. Some of the hardest-hit European countries have begun to roll back travel restrictions and booking trends in the US continue to increase from their historic lows. Data from the TSA last week showed that the average daily number of travelers going through their checkpoints increased for the fourth straight week. Around the same time, Delta announced that they’ll potentially be back flying to the major hubs again come June as demand ticks higher.

Getting Involved

If this momentum continues and there’s no second wave or punch from the pandemic, then it won’t be long before airlines are close to being back to full throttle. Southwest is still trading at 2014 levels, even after emerging as the least unscathed from round one with COVID-19. This makes them a pretty attractive target for investors looking to get exposure to a recovery in the industry.

Patience and a strong stomach will be needed for any investor getting involved now, but what’s a flight without a little turbulence to keep it interesting?