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Why Is Southwest (LUV) Up 8.7% Since Last Earnings Report?

It has been about a month since the last earnings report for Southwest Airlines (LUV). Shares have added about 8.7% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Southwest due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Narrower Than Expected Loss in Q1

Southwest Airlines incurred loss of 15 cents per share (excluding 3 cents from non-recurring items) in the first quarter of 2020, narrower than the Zacks Consensus Estimate of 48 cents. In the year-ago period, the company reported earnings of 70 cents per share. The results reflect the coronavirus-induced drop in passenger demand.

Meanwhile, operating revenues of $4,234 million lagged the Zacks Consensus Estimate of $4,397 million. The top line declined 17.8% year over year with passenger revenues, accounting for bulk (90.8%) of the top line, sliding 19%.

Operating Statistics

Airline traffic, measured in revenue passenger miles, declined 22% year over year to 23.93 billion in the quarter under review.  Also, capacity or available seat miles (ASMs) fell 6.7% to 35.35 billion due to the MAX groundings as well as the coronavirus pandemic. Load factor (percentage of seats filled by passengers) came in at 67.7%, down 1330 basis points on a year-over-year basis as the decline in traffic was wider than the capacity contraction.

Passenger revenue per available seat mile (PRASM: a key measure of unit revenues) dropped 13.1% to 10.88 cents. Moreover, revenue per available seat mile (RASM) declined 11.8% year over year to 11.98 cents owing to decline in load factor.


 Operating Expenses & Income

In the first quarter, operating loss totaled $110 million against operating income of $505 million in the year-ago quarter. Total adjusted operating expenses (excluding profit sharing, fuel and oil expense) dropped 1.9%.
 
Fuel price per gallon (inclusive of fuel tax: economic) was down 7.3% to $1.9. However, consolidated unit cost or cost per available seat mile (CASM), excluding fuel, oil and profit-sharing expenses, increased 5.1% year over year to 9.83 cents.Majority of the cost increase was due to lower capacity stemming from the Boeing 737 MAX grounding. Unit costs are expected to continue to rise in the second quarter due to the MAX grounding as well as capacity cuts owing to the coronavirus outbreak. The company expects its MAX flights to remain suspended through the end of October 2020.

Liquidity

The company had cash and equivalents of $5,545 million at the end of the first quarter. As of Mar 31, 2020, the company had long-term debt (less current maturities) of $2,288 million compared with $1,846 million at 2019-end. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Southwest returned $639 million to shareholders through share buybacks and dividend payments during the first quarter. The same is suspended as of now until further notice.

Outlook

With persistent weakness in passenger demand and bookings, Southwest anticipates operating revenues to plunge 90-95% year over year in April. Meanwhile, ASMs are expected to decline 60% and load factor is estimated at only 6% for the month. In May too, operating revenues are predicted to drop in the 90-95% range with 60-70% decrease in capacity and load factor in the 5-10% band.

Capacity is expected to decline at least 60% in the second quarter. Economic fuel costs are forecast in the range of $1-$1.1 per gallon in the same period. Meanwhile, the company’s cost-cutting measures, such as freezing hiring, pausing salary hikes and reducing capital expenses, are expected to reduce operating costs by more than $2 billion and capital expenditures by more than $1 billion in 2020.

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How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -29.81% due to these changes.

VGM Scores

At this time, Southwest has a poor Growth Score of F, however its Momentum Score is doing a bit better with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Southwest has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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