Southwest Is Soaring, But Can Still Go Higher

When Southwest Airlines (NYSE: LUV  ) rises just 4% in a week when peers such as JetBlue (Nasdaq: JBLU  ) , AMR Corp. (NYSE: AMR  ) , and Hawaiian Holdings (NYSE: HA  ) are rallying more than 10%, it's easy to wonder what went wrong.

In a word, nothing. Southwest beat consensus analyst estimates for third-quarter revenue and earnings, and it enjoyed a remarkable year-over-year improvement in both gross margins and cash flow:

Metric

Estimate

Actual

Year-Ago

Revenue

$3,170 million

$3,192 million

$2,666 million

Per-share earnings

$0.25

$0.26

$0.04

Gross margin

Not available

27.5%

21.5%

Free cash flow

Not available

$285 million

($126 million)

Sources: Yahoo! Finance and Capital IQ, a division of Standard & Poor's.

Importantly, CEO Gary Kelly doesn't see this as a temporary surge fueled by favorable comparisons. Instead, he sees Southwest building momentum.

"Our outlook for October is excellent, based on traffic and revenue trends, thus far. We are encouraged by the sustained momentum, especially in what is typically a seasonally weaker travel period," he said in a press release. Kelly also said the airline is on track for further improvement in the fourth quarter, so long as positive revenue and traffic trends continue as they have.

There's no reason to believe they won't. Southwest will soon pair up with AirTran (NYSE: AAI  ) , which is adding capacity just as others are cutting. Earlier today, AirTran said its Q3 profit more than tripled, thanks in part to a 13.7% increase in the average fare. That's an excellent sign.

For as risky as mergers have proven to be, this week's reports from Southwest and AirTran suggest these two possess enough financial strength to make this deal pay off for employees, customers, and shareholders.

Now it's your turn to weigh in. Would you buy Southwest Airlines at current prices? Please vote in the poll below and then leave a comment to explain your thinking.

Interested in more info on Southwest Airlines? Add it to your watchlist by clicking here.

Southwest Airlines is a Motley Fool Stock Advisor selection. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. The Motley Fool is also on Twitter as @TheMotleyFool. The Fool's disclosure policy has got to fly away now. Bye.


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