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Southwest shares at bargain level Other airline stocks set for near-term bounce, says analyst
CBSMW: How have the airline stocks been doing lately? Colak: In the last six months airline stocks in general are down roughly 30 to 40 percent. CBSMW: Any general reason for the downward spiral? Colak: Number one, concerns over fuel prices -- the prices have doubled over the last 11 months or so. CBSMW: Are we going to see any relief in the next few months? Colak: Well, we are starting to see capacity moderations come down a little bit. Starting in the fourth quarter we are going to see a slower growth rate in domestic markets carry into the next year. CBSMW: Any picks in the sector? Colak: Right now our favorite airline out there is Southwest Airlines (LUV: news, msgs). It came down recently from $21 to around $15 per share for two reasons. The primary reason is fuel -- the company entered the third and fourth quarters unhedged -- meaning they were 100 percent exposed to fuel prices and unfortunately fuel spiked up in that time. It took roughly a 3 to 5 cent earnings hit for the third quarter and they're also going to take an earnings hit in the fourth quarter. However, fundamentally the company is sound --
they've always made a profit for the last 25 years of operations. It's
a great company, great story. In the near term I think that hit to the
stock price is an excellent buying opportunity.
Look at the company's track record: If you had bought one share of Southwest back during its IPO, that one share right now, because of the number of splits that it has had, would be a little over 200 shares. Your initial investment, $2 dollars or whatever, right now would be worth 200 shares at $16 a share [editor's note -- that's $3,200]. CBSMW: Southwest has a unique marketing strategy. Colak: They specialize in shorthaul, high frequency, low fares. They fly into secondary airports which aren't congested so they can turn around quick. CBSMW: They have had a lot of competition in the last few years from companies like United, which started its Shuttle service. Is there growing competition for the consumer that Southwest caters too? How does that look for them? Have these companies been able to take back some of the market share? Colak: United's (UAL: news, msgs) Shuttle, Metro Jet, the Delta (DAL: news, msgs) shuttle service -- they are purely defensive measures by the respective airlines to ward off Southwest Airlines. Southwest is unequivocally the price leader in any market it flies into or any market which it enters. So they have zero fear of any major airline. CBSMW: That is quite a claim. Colak: Well, look at it this way: The average fare on Southwest is roughly about $70. The average fare on the average major airlines is $140, give or take a few dollars. CBSMW: Any advice for long-term investors who are interested in getting into this sector? Colak: I don't view the sector as a long-term hold, other than Southwest Airlines. These companies are highly cyclical, highly seasonal, highly labor intensive and highly capital intensive. They are still a couple of structural changes away from being good long-term investments. Namely, there are way too many domestic airlines, which in turn doesn't bode well for pricing. Pricing has always been an issue for airlines because unfortunately pricing is always determined by the least informed management or by the most desperate management. They do however, at these current valuations,
offer a great potential to make 30 to 40 percent returns in the next six
months. Once you get that return -- you sell. |
