After a dismal airline profit situation in 2017, in which only one of the major U.S. players is set to see a profit increase, the industry is looking forward to a decisive turnaround in 2018. One company’s numbers will soar above all its peers. That company is Southwest Airlines (LUV – yield 0.85%). It’s the one airline stock to buy now.
Southwest transports over 115 million customers annually to over 100 locations in the U.S., Central America and the Caribbean. The company is based in Dallas and has 55,000 employees.
On October 11, Southwest announced its intention to begin service to Hawaii in 2018, which is “about as far Southwest as you can go in the U.S.,” said Chairman and CEO Gary Kelly. In other recent news, Southwest launched service utilizing the Boeing 737 MAX 8 aircraft in October—the first among its airline peers to do so.
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Southwest will report third-quarter results on the morning of October 26. Investors are welcome to listen to management’s conference call at 12:30 PM ET. Wall Street consensus estimates point to third-quarter earnings per share (EPS) of $0.87, with a range of $0.81 to $1.00.
The company saw four consecutive years of aggressive earnings growth grind to a halt in 2016, when non-GAAP earnings per share (EPS) rose just 6.5%. Current-year numbers are lackluster, with 2017 EPS expected to fall 3.5%.
Airlines Struggling to Grow
Southwest is in good company, though, because most of its peers are also seeing their 2017 profits fall, including American Airlines Group (AAL) down 19.8%, Delta Air Lines (DAL) down 4.5%, JetBlue Airways (JBLU) down 18.0%, Spirit Airlines (SAVE) down 28.6% and United Continental Holdings (UAL) down 26.0%. The only major U.S. airline that’s expected to see profits grow in 2017 is Alaska Air Group (ALK) with EPS rising 2.5%. That’s certainly been a dreary situation for investors who like airline stocks!
On the bright side, all these airlines are expected to see modest profit growth in 2018, with EPS expected to rise between 4.1% on the low end at Alaska Air, to 10.7% on the high end at American Airlines—except for Southwest, which is expected to accomplish a whopping 24.6% EPS increase in 2018. That’s a number that will attract both institutional and individual investors!
In the coming months, portfolio managers will select LUV as the airline stock to buy now because the expected profit growth is so far ahead of its peers. Since buying activity drives share prices upward, that’s important information for investors who are looking to earn capital gains! The other key numbers also look great. The 2018 price/earnings ratio (P/E) is a low 13.0, and the most recent long-term debt-to-capitalization ratio is also low at 24%. That’s less than half the debt ratio at United Continental, and less than one-third the debt ratio at American Airlines!
The stock pays a small dividend of $0.125 per quarter, currently yielding 0.85%. Southwest historically announces a dividend increase each year during its annual shareholder meeting in May.
LUV is a large-cap stock with a $35 billion market capitalization. Institutions own 78% of Southwest’s outstanding shares.
LUV: The Airline Stock to Buy Now - Before Analysts Do
While it’s true that some equity portfolio managers make stock selection decisions based on a company’s “story,” most of them pick stocks based on balance sheet numbers. What’s become obvious to you today about Southwest Airlines is the same thing that will become obvious to equity portfolio managers heading into 2018: Southwest has better prospects for profit growth than all its U.S. peers, and a lower P/E and debt ratio than the vast majority of them. No matter how they slice and dice the numbers, LUV is going to rise to the top of analysts’ lists of top stock picks among airlines.
After trading sideways for two full years, LUV rose at the end of 2016, only to establish a very wide sideways trading range in 2017 between 49 and 64. The stock will likely continue trading within that range for a while longer, eventually surging past 64 to new all-time highs. On the downside, a stock market correction could bring LUV back down to 49, which will represent a serious buying opportunity.
LUV is an excellent stock for long-term growth investors, with a wide enough trading range to also accommodate traders. Buy LUV this fall to capitalize on its 2018 successes!
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