Southwest Airlines Co
Why Southwest Airlines' Stock is Suddenly Compelling
Fundamentals Technicals | Support: 28.88 | Resistance: 34.79 
Southwest Airlines was a pioneer when it entered the airline space. The company chose a single airplane type so their maintenance crews were experts and remained experts on all things airplane. The company had the exact same capacity on each flight, the pilots were trained and used their planes, the streamlining was novel and, though it may seem so, was far from trivial. It burst the company onto the scene as a winner, and one of very (very) few profitable carriers.
Since then LUV has seen competition from other discounters, Like Jet Blue (JBLU) and Virgin (VA) as well as Spirit Airlines (SAVE) and a number of others. The stock has been getting crushed recently as new capacity is being added to the industry which has disrupted the perfect storm the entire segment felt for a while of lower fuel prices and higher airfares.
There's also an ugly report from the AP that the Justice Department is investigating whether airlines colluded to fix prices. The DOJ is investingating if airlines have removed unprofitable routes and tried to slow down growth in order to prop up the prices of airfares all the way back since 2008.
We'll examine the stellar fundamentals for LUV in the face of a horrific period of stock returns.
The average estimate for next quarter's revenue of $5,169.5 million is above last quarter's $4,414.0 million.
LUV has a one bull (lowest rated) technical rating because it's trading below the 10-day (short-term), 50-day (medium-term) and 200-day (long-term) moving averages.
Here are the consensus estimates for next quarter. Note that last quarter's actual result is included at the far right.
| EARNINGS ESTIMATES | |||||
| Earnings Date | EPS | Revenue (Mean) | Revenue (Median) | Last Quarter (Actual) | |
| 2015-07-23 | $1.03 | $5,169.5 M | $5,134.0 M | $4,414.0 M | Provided by ZACKS |
Let's look at the core elements that drive the company's fundamental rating.
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Fundamentals Rating Summary |
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| METRIC | CURRENT | 1YR AGO | 2YR AGO | DIRECTION |
| Revenue (TTM US$ Millions) | 18,853 | 17,781 | 17,181 |  |
| Operating Margin (QTR) | 1.210 | 1.06 | 1.02 | RISING |
| Net Income (TTM US$ Millions) | 1,437 | 847 | 382 | RISING |
| Levered Free Cash Flow (TTM US$ Millions) | 1,326 | 1,185 | -124 | RISING |
| Capital Expenditures (TTM US$ Millions) | 2,016 | 1,320 | 1,755 | RISING |
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| Stock Returns and Chart |
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Before we dig into the fundamental trends that drive the rating, let's look at a two-year stock chart with regression channel and 10-day momentum (on the bottom).
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Now let's examine the visualizations of the critical financial measures.
| METRIC | CURRENT | 1YR AGO | 2YR AGO | DIRECTION |
| Revenue (TTM US$ Millions) | 18,853 | 17,781 | 17,181 | |
Everything with respect to fundamentals is going to look very good. Revenue (TTM) is trending higher meaning that it has increased for at least five consecutive quarters (ten quarters in this case).
Revenue over the trailing twelve months is now at an all-time high (yet again) up 6% year-over-year and nearly 10% over the last two-years.
What do all these numbers mean?
LUV's fundamental rating benefited these results:
1. The one-year change was positive (but no extra points were given for a large percentage increase).
2. The two-year change was positive.
Finally, the up trend (consecutive quarters) in revenue benefited the fundamental (star) rating.
Let's look at Revenue (TTM US$ Millions) in the chart below.
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| METRIC | CURRENT | 1YR AGO | 2YR AGO | DIRECTION |
| Operating Revenues/Operating Expense | 1.210 | 1.06 | 1.02 | RISING |
Operating revenue over operating expense simply shows us how much revenue (in dollars) is generated for every dollar of expense. The ratio must be (at a minimum) above 1.0 in order for a company to turn an operating profit. For the latest quarter LUV showed a ratio of 1.21 and last year in showed a ratio of 1.06. For a highly competitive industry, that kind of improvement is huge and in this case is largely due to fuel expense coming down (oil prices).
What do all these numbers mean?
A year ago Operating Revenues/Operating Expense was 1.06. In the last year we can see operating margins are increasing and are also currently greater than 1.0 (the critical level).
LUV's fundamental rating was affected from the operating margin numbers in two ways:
1. The current value is above 1.0 (the firm generates an operating profit).
2. The one-year change was positive (raises the rating).
Let's look at Operating Revenues/Operating Expense in the chart below with the total assets in the orange line.
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| METRIC | CURRENT | 1YR AGO | 2YR AGO | DIRECTION |
| Net Income (TTM US$ Millions) | 1,437 | 847 | 382 | RISING |
Net Income (after tax profit) over the trailing twelve months (TTM) for LUV is rising and has smashed an all-time high. For the most recent trailing-twelve-months (TTM) the company reported net income of $1.4 billion, a 70 year-over-year rise. We note that the quarterly net income is also rising.
In our next chart we plot Net Income (TTM US$ Millions) in the blue bars and the quarterly results in the gold line. Note the rising bars from a year ago (four quarters ago).
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| METRIC | CURRENT | 1YR AGO | 2YR AGO | DIRECTION |
| Levered Free Cash Flow (TTM US$ Millions) | 1,326 | 1,185 | -124 | RISING |
It's the same story here with Levered Free Cash Flow (FCF) (TTM US$ Millions). FCF is up nearly 12% year-over-year and up from a negative FCF two-years ago.
For our next chart we plot Levered Free Cash Flow (TTM US$ Millions) in the blue bars through time. Note the rising bars from a year ago (four quarters ago).
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| METRIC | CURRENT | 1YR AGO | 2YR AGO | DIRECTION |
| Capital Expenditures (TTM US$ Millions) | 2,016 | 1,320 | 1,755 | RISING |
With all this great growth in revenue, margins, earnings and FCF, LUV is still investing in Capital Expenditures (CapEx) (TTM US$ Millions). In fact, CapEx is at an all-time high, and up over 50% year-over-year. Further, we can see that CapEx today relative to two-years ago is increasing (14.87%) from last year's value of $1.75 billion.
In our final time series chart we plot Capital Expenditures (TTM US$ Millions) in the blue bars. Note the rising bars from one-year ago.
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Summary
Southwest Airlines is seeing revenue and earnings at all-time highs along with CapEx. Free cash flow is up double digits (%) and operating margins are also improving. From a fundamental point of view, the company is extremely strong. The technicals on the other hand are quite weak, with the stock in a sort of organized free fall. Southwest is adding capacity to the industry, as are other airlines, each trying to realize greater profits from favorable fuel prices. For those looking for investments that aren't tech MOMO names and aren't trading at all-time highs, the airlines may be a compelling investment thesis to examine. A prior article on JetBlue Airlines is another recommended read.