Is Southwest Too Expensive?

With shares of Southwest Airlines (NYSE:LUV) trading at around $13.85, 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:

C = Catalyst for the Stock’s Movement

Southwest has enjoyed strong upward momentum over the past six months. Analysts also like the stock: 6 Buy, 7 Hold, 1 Underperform, 1 Sell. The analyst mean target for Southwest is $15.42. These aren’t the only positives.

According to Glassdoor.com, employees have rated their employer a 4.1 of 5, and 87 percent of employees would recommend the company to a friend. Therefore, the company culture is strong. Leadership is even more impressive as 90 percent of employees approve of CEO Gary C. Kelly.

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Southwest recently hiked its quarterly dividend by 400 percent and boosted its stock repurchase program to $1.5 billion from $1 billion. At the same time, cost savings have been good.

Yet another positive is that online traffic has slightly improved. According to Alexa.com, Southwest.com currently ranks at No. 807 on a Global scale, and at No. 162 in the United States. Over the past three months, pageviews-per-user has increased 0.6 percent to 6.32, time-on-site has increased 2 percent to 6:45, and the bounce rate (only one pageview per visit) has declined 8 percent to 12.3 percent. These are all positive signs.

On the negative side, there are many arguments that Southwest is too customer friendly. In other words, Southwest doesn’t charge enough fees. This keeps customers happy, but it has the potential to lead to frustrated investors.

As far as valuation is concerned, Southwest is starting to get expensive. Its currently trading at 27 times earnings while only sporting a profit margin of 2.22 percent. Comparatively, Delta Air Lines (NYSE:DAL) is trading at 17 times earnings and has a profit margin of 2.43 percent. JetBlue Airways (NASDAQ:JBLU) is trading at 18 times earnings and has a profit margin of 2.21 percent. This makes Delta the most appealing of the three from a fundamental standpoint. But what about dividends?

Southwest currently yields 1.20 percent whereas Delta yields 1.30 percent and JetBlue doesn’t offer any yield. Delta wins again. As far as stock performance is concerned, all three are up year-to-date, but Delta has been the most impressive. The chart on the next page will provide further details.

Let’s take a look at some important numbers prior to forming an opinion on this stock.

T = Technicals Are Mixed

Southwest hasn’t performed well over the past month, but the trend is still to the upside.

1 Month Year-To-Date 1 Year 3 Year
LUV -1.98% 35.65% 54.85% 15.83%
DAL -0.33% 52.23% 79.98% 34.35%
JBLU -6.07% 10.84% 25.05% -2.46%

At $13.85, Southwest is trading below its 50-day SMA, but still above its 200-day SMA.

50-Day SMA 13.98
200-Day SMA 12.14

E = Equity to Debt Ratio Is Strong

The debt-to-equity ratio for Southwest is stronger than the industry average of 2.00.

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Debt-To-Equity Cash Long-Term Debt
LUV 0.44 3.14B 3.04B
DAL N/A 3.60B 12.99B
JBLU 1.49 849.00M 2.83B

E = Earnings Have Been Steady

Earnings have fluctuated on an annual basis, but they have been impressive, especially for an airline considering the industry’s history. Revenue has consistently improved over the past three years.

Fiscal Year 2008 2009 2010 2011 2012
Revenue ($) in millions 11,023 10,350 12,104 15,658 17,088
Diluted EPS ($) 0.24 0.13 0.61 0.23 0.56

Looking at the last quarter on a year-over-year basis, revenue increased 2.30 percent, but earnings declined 39.80 percent.

Quarter Mar. 31, 2012 Jun. 30, 2012 Sep. 30, 2012 Dec. 31, 2012 Mar. 31, 2013
Revenue ($) in millions 3,991 4,616 4,309 4,173 4,084
Diluted EPS ($) 0.13 0.30 0.02 0.11 0.08

Now let’s take a look at the next page for the Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

Conclusion

Southwest still has strong upward momentum. Delta offers a better valuation, a higher yield, and the stock has been outperforming Southwest over the past year. That said, with a weak consumer not seeming to gain much strength, fewer fees might be appealing at Southwest.

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For the moment, Southwest is still an OUTPERFORM.

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All content posted should not be considered professional advice. Please do your own research and consult with a professional financial advisor before making any investment decisions. I don’t have any positions in this stock.

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