Why Is Southwest (LUV) Down 4.1% Since Last Earnings Report?

Zacks Equity Research

It has been about a month since the last earnings report for Southwest Airlines (LUV). Shares have lost about 4.1% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Southwest due for a breakout? 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.

Earnings Beat at Southwest Airlines in Q1

Southwest Airlines delivered first-quarter 2019 earnings per share of 70 cents, beating the Zacks Consensus Estimate of 61 cents. However, the bottom line declined year over year. Results were affected to the tune of approximately $150 million due to flight cancellations, effects of the government shutdown and softness in bookings.

Operating revenues of $5,149 million outpaced the Zacks Consensus Estimate of $5,140.9 million. The top line also rose 4.1% year over year. Passenger revenues accounting for bulk (92.2%) of the top line improved 3.5% year over year.

Operating Statistics

Airline traffic, measured in revenue passenger miles, inched up 0.9% year over year to 30.7 billion in the quarter under review. Capacity or available seat miles (ASMs) expanded 1.4% to 37.89 billion. Load factor (percentage of seats filled by passengers) came in at 81%, down 50 basis points on a year-over-year basis as capacity expansion exceeded traffic growth.

Passenger revenue per available seat mile (PRASM: a key measure of unit revenues) inched up 2% to 12.52 cents. Moreover, in the reported quarter, revenue per available seat mile (RASM) rose 2.7% year over year to 13.59 cents.


Operating Expenses & Income

In the first quarter, operating income (excluding special items) totaled $505 million compared with $584 million in the year-earlier period. Total adjusted operating expenses (excluding profit sharing, fuel and oil expense plus special items) climbed 9.5% year over year. The increase in costs was due to delay in launching the Hawaii service, flight cancellations and other factors.

Fuel price per gallon (inclusive of fuel tax: economic) was down 1.9% year over year to $2.05. Consolidated unit cost or cost per available seat mile (CASM) excluding fuel, oil and special items increased 7.4% year over year to 9.58 cents.

Liquidity

The company had cash and cash equivalents of $2,344 million at the end of the first quarter compared with $1,854 million at the end of 2018. As of Mar 31, 2019, the company had a long-term debt (less current maturities) of $2,602 million compared with $2,771 million at 2018 end.

While the carrier generated a free cash flow of $945 million during the first quarter, it returned $678 million to its shareholders through $178 million in dividends and $500 million via share repurchases.

Q2 & 2019 Outlook

The company anticipates RASM (revenue per available seat mile) to rise 5.5-7.5% year over year in the second quarter of 2019. The RASM guidance takes into account benefits from the revenue management enhancements implemented last year and several other positives. The shift in the timing of Easter will also benefit second-quarter RASM.

Economic fuel costs are estimated between $2.10 and $2.20 per gallon in the second quarter compared with $2.21 in the prior-year period. Additionally, second-quarter CASM (excluding fuel and oil expense plus profit-sharing expense) is expected to expand in the 10.5-12.5% range year over year. This increase in expenses is due to underutilized fleet as a result of delay in initiating the Hawaii service and the MAX 8 groundings, which caused numerous flight cancellations among other factors. The metric is anticipated to ascend 5.5-6.5% for the full year as well. This downside is primarily attributable to labor-related costs and lower capacity on account of the MAX groundings.
 

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted -6.99% due to these changes.

VGM Scores

At this time, Southwest has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

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

Outlook

Estimates have been broadly trending upward 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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