Is Southwest Airlines an Attractive Investment?

With shares of Southwest Airlines (NYSE:LUV) trading around $27, is LUV an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Southwest Airlines is a passenger airline that provides scheduled air transportation in the United States. Consumers and companies across the nation are now looking to travel at an increasing rates, and since air travel is quicker and is becoming less expensive, it is becoming a common transportation method for many. As costs decrease and flights become more efficient, look for business and retail customers to fly at rising rates. Southwest Airlines stands to see soaring profits as consumers and businesses look to travel more than ever.

A Southwest plane has backed into a JetBlue (NASDAQ:JBLU) plane at a terminal at Boston Logan Airport Monday morning. The incident happened as the Southwest plane began to leave its gate, and a wing of the plane hit part of the tail wing of a JetBlue plane that was sitting out of the gate. The collision took a chunk out of one of the wings of the Southwest plane. It wasn’t immediately clear if the JetBlue plane received any damage. Adam Cowley, a passenger on the Southwest flight that was scheduled to leave for Kansas City, Missouri just after 7 a.m., said as the plane was backing out, he felt a bump, looked out the window, and saw his plane and the JetBlue plane touching. The planes were separated at around 8 a.m.

A spokesperson for Massport, the agency that runs Logan Airport, said in a statement that as the Southwest plane was pushing back from the gate, its “wingtip struck the horizontal stabilizer of an empty parked JetBlue” plane. The incident has not affected airport operations, the statement read, and no one was injured. Southwest reports that it is working to get the 108 passengers who were on the plane onto other flights. Meanwhile, the airline stated, the plane involved in the collision is “out of service for repairs and inspection.” The FAA is also investigating.

T = Technicals on the Stock Chart Are Strong

Southwest Airlines stock has been exploding to the upside in the past couple of years. The stock is currently trading near all time highs and looks set to continue. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Southwest Airlines is trading above its rising key averages which signal neutral to bullish price action in the near-term.

LUV

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Southwest Airlines options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Southwest Airlines options

23.07%

43%

40%

What does this mean? This means that investors or traders are buying a significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

July Options

Flat

Average

August Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a significant amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Southwest Airlines stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Southwest Airlines look like and more importantly, how did the markets like these numbers?

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

175.00%

6.11%

161.54%

-19.85%

Revenue Growth (Y-O-Y)

2.01%

1.45%

5.48%

0.86%

Earnings Reaction

-1.31%

-2.43%

3.72%

-0.14%

Southwest Airlines has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with Southwest Airlines recent earnings announcements.

P = Average Relative Performance Versus Peers and Sector

How has Southwest Airlines stock done relative to its peers, Delta Air Lines (NYSE:DAL), American Airlines (NASDAQ:AAL), JetBlue Airways (NASDAQ:JBLU), and sector?

Southwest Airlines

Delta Air Lines

American Airlines

JetBlue Airways

Sector

Year-to-Date Return

45.46%

52.38%

72.79%

21.90%

49.13%

Southwest Airlines has been an average performer, year-to-date.

Conclusion

Southwest Airlines provides air travel services to consumers and companies across the nation. A Southwest plane has backed into a JetBlue plane at a terminal at Boston Logan Airport Monday morning. The stock has been moving higher in recent years and is currently trading near all time highs. Over the last four quarters, earnings and revenue figures have been increasing, which has left investors pleased. Relative to its peers and sector, Southwest Airlines has been an average year-to-date performer. Look for Southwest Airlines to continue to OUTPERFORM.

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

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