Is Southwest Airlines Enticing After Recent News?

With shares of Southwest Airlines (NYSE:LUV) trading around $20, 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 said on Monday it will offer nonstop flights from its base at Dallas Love Field, Texas to 15 cities including Chicago, New York, and Los Angeles later this year, after the expiry of flight restrictions from that airport. The carrier plans to fly nonstop to Baltimore, Denver, Las Vegas, Orlando, Florida, and Chicago Midway from October 13. Service to Atlanta, Washington, D.C., Los Angeles, New York LaGuardia, Phoenix, and other U.S. cities will begin November 2. The Wright Amendment, a federal law introduced in the late 1970s, restricts nonstop flights that Southwest can operate out of Dallas Love Field to nine states. Southwest said the October expiration of the law will allow direct flights from Love Field to 41 more states and the District of Columbia. The repeal “signifies a turning point for the Southwest brand not just in Dallas, but from coast-to-coast,” Southwest Chief Executive Gary Kelly said in a statement.

T = Technicals on the Stock Chart Are Strong

Southwest Airlines stock has been exploding to the upside in the past couple of years. However, the stock is currently trading sideways and may need time to stabilize before heading higher. 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

31.99%

96%

93%

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

Put IV Skew

Call IV Skew

March Options

Flat

Average

April 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 very 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 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 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

6.11%

161.54%

-19.85%

-17.97%

Revenue Growth (Y-O-Y)

1.45%

5.48%

0.86%

11.27%

Earnings Reaction

-1.88%

3.71%

-0.14%

0%

Southwest Airlines has seen mixed 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.

P = Excellent 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

8.17%

7.37%

33.03%

0.35%

6.29%

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 company said on Monday it will offer nonstop flights from its base at Dallas Love Field, Texas to 15 cities including Chicago, New York, and Los Angeles later this year. The stock has been moving higher in recent years, but is now trading sideways. Over the last four quarters, earnings have been mixed while revenues have been increasing, which has left investors pleased with recent earnings announcements. Relative to its peers and sector, Southwest Airlines has been a relative year-to-date performance leader. Look for Southwest Airlines to continue to OUTPERFORM.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

More From Wall St. Cheat Sheet:

More from The Cheat Sheet