Will Southwest Airlines Continue to Ascend?

With shares of Southwest Airlines (NYSE:LUV) trading around $16, 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.

Southwest Airlines reported earnings and revenues figures on Wednesday morning that have pleased the markets. Gary C. Kelly, company chairman of the board, president, and chief executive officer, said: “We are very pleased to report a record third quarter earnings performance. Our People delivered very strong year-over-year earnings growth as we continued to transform our Company for the future. Our continued focus on strategic initiatives is paying off, and I am very proud of our outstanding Employees for a very solid third quarter financial performance.”

T = Technicals on the Stock Chart Are Strong

Southwest Airlines stock has been exploding to the upside over 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 signals neutral to bullish price action in the near term.

LUV

Source: Thinkorswim

Taking a look at the implied volatility 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

22.73%

0%

0%

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

Put IV Skew

Call IV Skew

November Options

Flat

Average

December Options

Flat

Average

As of Thursday, there is 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 very minimal amount of call and put option contracts and are leaning neutral to bullish over the next two months.

E = Earnings Are Mixed 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’s 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?

2013 Q3

2013 Q2

2013 Q1

2012 Q4

Earnings Growth (Y-O-Y)

161.54%

-19.85%

-17.97%

-0.43%

Revenue Growth (Y-O-Y)

5.48%

0.86%

11.27%

17.65%

Earnings Reaction

3.29%*

-0.14%

0%

0.79%

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

*As of this writing.

P = Average Relative Performance Versus Peers and Sector

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

Southwest Airlines

Delta Air Lines

US Airways

JetBlue Airways

Sector

Year-to-Date Return

65.87%

121.9%

68.74%

32.52%

62.75%

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

Conclusion

Southwest Airlines provides air travel services to consumers and companies across the nation. A recent earnings release has the markets upbeat about the company. The stock has been moving higher in recent years and is now trading near all-time highs. Over the last four quarters, earnings have been decreasing while revenues have been increasing, which has produced pleased investors. Relative to its peers and sector, Southwest Airlines has been an average year-to-date performer. Look for Southwest Airlines to continue to OUTPERFORM.

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