After reaching pre-Covid levels in April, the shares of Southwest Airlines (NYSE: LUV) have observed a downtrend in the past two months as booking trends weakened due to the fourth wave of the pandemic. However, the company’s significantly lower debt outstanding and higher operating margin is likely to assist strong cash generation as infections decline. The third round of payroll support program requires airlines to suspend dividends and share repurchases until September 2022. Thus, investors can bet on recovering travel demand to realize capital gains. Considering the demand surge in the second quarter as an indicator for a quick rebound after the fourth wave, Trefis believes that LUV stock is a good value investment. We highlight the historical trends in the company’s revenues, margins, and valuation multiple in an interactive dashboard analysis, Southwest Airlines’ Valuation.
Strong second-quarter performance prompted the management to increase capacity
In Q2 2021, Southwest Airlines reported a 32% contraction in net revenues and a 16% reduction in capacity (available seat miles) over Q2 2019, a sizable improvement over Q1 2021 as travel demand recovered. The company reported $348 million of net income and $2 billion of operating cash. Given the suspension of dividends and share buybacks, the operating cash supported $95 million of capital expenses, certain short-term investments, and enhanced the company’s cash position. On the operational front, occupancy rate increased by 20-percentage-points (q-o-q) to 83% prompting the management to increase capacity during the latter half of the year.
Demand surge in second-quarter indicates a quick rebound after the fourth coronavirus wave
The decline in coronavirus cases in the second quarter led to a surge in air travel demand to the extent that the daily passenger numbers at TSA checkpoints were 20% below 2019 levels. Notably, the daily passenger figures observed a 50% growth in Q2 from 1.3 million in April to 1.9 million in June. Thus, the strong surge indicates growing leisure travel demand also described by many operators as revenge tourism. Given Southwest’s strong balance sheet, a brief period of low demand is unlikely to weigh on finances. Per Q2 filings, the company reported $(5.5 billion) of net debt, which can assist salary expenses for a quarter and still retain balance sheet strength (negative net debt indicates excess cash over long-term debt).
Is there a better investment over Southwest Airlines? Southwest Airlines Stock Comparison With Peers summarizes how LUV compares against peers on metrics that matter. You can find more such useful comparisons on Peer Comparisons.