Today, several major U.S. airliners have run into turbulence on general concerns that increased seating capacity will lead to lower ticket prices, and weigh on forward sales and earnings. Apparently some of the selling action was sparked by Southwest Airlines’ (LUV) announcement that it expects passenger revenue per available seat mile (PRASM) to decline for the second quarter. Southwest shares pulled back 9% after yesterday’s announcement, and several other major domestic airlines were also hit:
- American Airlines (AAL) plunged 10%.
- United Continental Holdings (UAL) fell 10%.
- JetBlue Airways Corp. (JBLU) pulled back 6.9%.
- Delta Air Lines (DAL) declined 5.6%.
Is the U.S. airline industry grounded, or does this pullback present a buying opportunity? For two of the five stocks above, I’d say it’s the latter. As you can see from the chart below, two of these stocks are doing quite well in shoring up their financial statements and remain compelling buying opportunities: Southwest Airlines and JetBlue (JBLU). And of those two, I consider Southwest to be the clear choice. Here’s why:
My Top Airliner: Southwest
And if you’re looking for a stable stock to own during somewhat uncertain times, you’d do well to fly with Southwest Airlines. As the world’s largest low-cost carrier, Southwest Airlines dominates U.S. air space. And through its recent acquisition of AirTran Airways, the company has grown its international presence by leaps and bounds.
In an industry plagued with politics and regulations, Southwest is by far the most efficient passenger airline in the U.S. And there’s good reason that this stock’s ticker symbol is “LUV”: The company regularly tops the list for Airline Quality Ratings in overall service.
As far as I can tell, all this talk about capacity should be a blip on the radar. Southwest is taking advantage of the 2014 repeal of the Wright amendment, which restricted non-stop flying at the Dallas Love Field airport. Now that the amendment has been repealed, Southwest management decided to expand service out of Love Field in response to pent-up demand. While some analysts prefer to see airlines limit their capacity growth, this appears to be a smart move on the part of Southwest Airlines.
Add in a 0.6% dividend yield and a billion-dollar stock buyback program and it’s not difficult to see that shareholders LUV this stock too. But what I really like about Southwest Airlines is its sales and earnings projections for the next several quarters. This quarter, the company is expected to post 60% earnings growth; for FY 2015 the company is headed towards 75% bottom-line growth. Then again, with the company’s strong track record of earnings surprises, the sky is the limit for Southwest. LUV is an A-rated buy. My recommendation is that you use this near-term pullback as an opportunity to pick up LUV shares on the cheap…before it takes off to new heights once again.