The airline industry has been severely impacted due to the ongoing pandemic. It is by far the worst crisis in the history of the airline industry. However, as the vaccines have started to roll-out at a fast clip at least in the U.S., it makes sense to take a look at these beaten-down stock right now. Here, we analyze if Southwest Airlines (NYSE: LUV) can make a comeback and outpace the S&P 500 in 2021 and beyond.
Southwest Airlines revenue fell 65% in Q4
Southwest Airlines reported its Q4 results earlier this year and the numbers were not pretty. The company’s operating revenue fell 65% year over year and it lost $761 million in the quarter. This means its total loss in 2020 stood at $3.5 billion.
However, Southwest Airlines is better positioned than most other airline companies as it ended the year with $14.3 billion in available liquidity that includes cash and debt. A strong balance sheet will allow Southwest to withstand a volatile macro environment and cushion the company from near-term losses.
In the first quarter of 2021, the company expects to burn $17 million each day. The airline sector is capital intensive and companies continue to burn cash at a rapid rate given tepid demand and restrictions on global travel.
Despite a steep decline in the top-line, Southwest is trading near its pre-COVID-19 stock price. During the earnings call, company CEO Gary Kelly remained cautiously optimistic stating, “While we hope to achieve cash burn break even in 2021, it is wholly dependent upon a substantial rebound in passenger traffic and revenue, and it is difficult to predict the timing of such a rebound."
What next for LUV stock investors?
There is a good chance that a significant portion of the U.S. population will be vaccinated by the end of July. So, investors can remain hopeful that pent-up vacation demand will be unleashed in the second half of 2021 and offset the decline in international travel for Southwest Airlines and peers.
However, what works for Southwest Airlines is that the company is primarily focused on the domestic market and offers limited international flying routes. Southwest in-fact added two strategic domestic routes in February and announced services to 17 new destinations since the pandemic began.
This expansion into smaller leisure destinations is bound to pressurize the margins of peer airline companies. Most of the airline companies earn significant profits on routes to smaller and mid-sized cities.
Last month, airline stocks including Southwest gained momentum after the White House finalized a $1.9 trillion relief package that includes aid for airline companies.
The final takeaway
LUV stock is valued at a market cap of $36 billion which means its trading at a forward price to sales multiple of 2.54x. Its forward price to 2022 earnings multiple is 22x. Analysts tracking the stock expect the company to increase sales by 56.5% to $14.16 billion in 2021 and by 40.4% to $19.9 billion in 2022. Comparatively, its bottom-line is also forecast to improve from a loss per share of $6.22 in 2020 to earnings of $2.82.
Long-term investors should know that Southwest Airlines was profitable for 47 consecutive quarters before the pandemic struck. Despite its sizeable loss in 2020, the company’s robust financials and strong liquidity position make it one of the best recovery stocks to buy right now.
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