Will Southwest Airlines See Higher Prices?

With shares of Southwest Airlines (NYSE:LUV) trading around $14, 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 which provides scheduled air transportation in the United States. Consumers and companies across the nation are now looking to travel at an increasing rates. 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.

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T = Technicals on the Stock Chart are Strong

Southwest Airlines stock has seen a consistent downtrend extending back to the early 2000s. The stock has made an explosive move this year that has taken it to the top end of its multi-year downtrend. 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

27.34%

56%

53%

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

June Options

Flat

Average

July 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’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?

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2013 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

-38.46%

-46.21%

111.11%

42.86%

Revenue Growth (Y-O-Y)

2.33%

1.58%

-0.05%

11.61%

Earnings Reaction

0%

0.79%

0.33%

-2.86%

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

P = Excellent 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), JetBlue Airways (NASDAQ:JBLU), and sector?

Southwest Airlines

Delta Air Lines

US Airways

JetBlue

Sector

Year-to-Date Return

39.65%

54.17%

35.78%

11.19%

28.46%

Southwest Airlines has been a relative performance leader, year-to-date.

Conclusion

Southwest Airlines provides air travel services to consumers and companies across the nation. The stock is seeing an explosive move that has taken it to a decisive price level. Over the last four quarters, earnings have been mixed while revenues have increased which have satisfied investors. Relative to its peers and sector, Southwest Airlines has been a performance leader, year-to-date. Look for Southwest Airlines to OUTPERFORM.

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