Southwest Airlines Co (NYSE:LUV) has really struggled this year, with LUV stock down almost 20%. Ouch. That’s a pretty poor performance for a company that’s actually doing well. Given the huge decline so far this year, many investors are starting to wonder whether Southwest Airlines stock is a name to add to their portfolio.
From a PR perspective, Southwest hasn’t had the easiest time, either. An engine failure last month resulted in an emergency landing in Philadelphia and one fatality. While this is indeed a tragic situation, it’s also a rare one.
One could ask themselves whether LUV is the right investment or if Delta Air Lines, Inc. (NYSE:DAL), United Continental Holdings Inc (NYSE:UAL) or Hawaiian Holdings, Inc. (NASDAQ:HA) is better.
To be honest, a basket approach to airline stocks isn’t the worst idea — meaning investors own a handful of them rather than one individual name.
The entire industry should continue to benefit from increasing travel trends. Everyone from the airlines, to Boeing Co (NYSE:BA), to independent studies have said the trends in air travel will continue to grow for many years. As the U.S. and global economies continue to strengthen, this should only benefit demand for air travel.
No longer are airlines gigantic, bankrupt money pits for investors. In fact, they’re profit-generating machines.
Valuing LUV Stock
Analysts expect Southwest to generate about $22.8 billion in sales this year, up 5.2% from last year. In 2019, they expect that revenue to grow almost 6%. But the growth story is on the bottom line, where expectations call for 30% growth this year and 17.5% next year.
Of course, bottom-line growth outpacing top-line growth bodes well for margins. But it also bodes well for the stock’s valuation. Consider that, despite mid-single-digit revenue growth and 30% earnings growth this year, LUV stock trades at just 11.6 times earnings. It trades at less than 10 times 2019 earnings estimates.
That’s probably why analysts have such high price targets on the stock. Over the last year, the lowest price target (that I could find) is $64 — that’s $11 per share above current prices!
That alone implies more than 20% upside from current levels, and remember, that’s the lowest price target. The average price target near $70 sits more than 30% above current levels and would easily set new 52-week highs for Southwest Airlines stock should it get there.
While it doesn’t help that April airfare prices posted a sudden 2.7% drop month to month, at what valuation do investors simply shrug that kind of news off? It’s clear that LUV and others have become a concentrated group of airlines capable of essentially printing cash from their businesses.
If that weren’t the case, would Warren Buffett of Berkshire Hathaway Inc. (NYSE:BRK.B, NYSE:BRK.A) — who was strongly against owning airline stocks for decades — have taken significant stakes in four of them? (Those four being LUV, DAL, UAL and American Airlines Group Inc (NASDAQ:AAL)).
I don’t think so.
Trading Southwest Airlines Stock
On Wednesday, we took a look at LUV stock as part of our top stock trades. The stock posted a solid rally and looks to have put in a bottom near $51.
But not so fast.
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Bulls can’t let their guard down — not yet anyway. While $51 has been a very solid level of support over the last 18 months, it’s no guarantee to hold. Right now, bulls need to break LUV out of its downward channel with authority. That would require a move to about $54 per share.
Even if LUV stock can do so, it will have plenty of overhead resistance. Specifically, all three major moving averages are above it, between $55.50 and $58. There could be further levels of resistance as well.
That’s not to dissuade the bulls, though. It’s only to say that, just because Southwest Airlines stock may not crash, doesn’t mean it has blue skies ahead of it. $51 is a must-hold level, and from there, bulls can start to tackle its other resistance levels. $64 may be an easy call from a fundamental standpoint for the analysts, but it’s a different story on the charts.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
