In its fiscal first quarter, Southwest Airlines Co. (LUV - Get Rating) incurred a pre-tax net loss of approximately $380 million ($294 million after-tax) due to the December 2022 operational disruption. Travel cancellations and reduced bookings in January and February caused a $325 million revenue decline for the quarter.

Despite the disappointing first-quarter bottom line, March saw a significant improvement in travel demand and revenue, resulting in a profitable month and record-breaking first-quarter sales. Managed company revenues increased significantly in March, nearly approaching levels observed in March 2019.

The company attributes this recovery to investments in Southwest Business and expansion into Global Distribution Systems, which have considerably aided in growing its corporate travel sector.

Furthermore, LUV anticipates solid profits in the fiscal second quarter and maintains its expectation of strong profits and year-over-year growth in both margins and return on invested capital for 2023.

Also, the company remains committed to returning value to its shareholders. On May 17, LUV declared its 177th quarterly dividend of $0.18 per share, payable on July 12, 2023, to shareholders of record as of June 21, 2023. The company pays a $0.54 dividend annually, yielding 1.5% on the current price level.

Shares of LUV have gained 19.4% over the past month to close its last trading session at $35.95.

Here is what could shape LUV’s performance in the near term:

Mixed Financials

During the fiscal first quarter that ended March 31, 2023, LUV’s passenger revenue increased 23.5% year-over-year to $5.11 billion. Its operating revenues grew 21.6% from the year-ago value to $5.71 billion. However, the company registered a loss and loss per share of $159 million and $0.27, respectively, during the same period.

In addition, as of March 31, 2023, the company’s total assets stood at $35.55 billion, compared to $35.67 billion as of December 31, 2022.

Mixed Historical Growth

Over the past three years, LUV’s revenue grew at a 4.9% CAGR. The company’s total assets rose at a CAGR of 9.8%. However, the stock’s EBITDA and net income declined at CAGRs of 14.4% and 28.8%, respectively, during the same period.

Favorable Analyst Estimates

Analysts expect LUV’s revenue to increase 11.7% year-over-year to $26.60 billion for the fiscal year ending December 2023. The company’s EPS for the ongoing year is expected to rise 130.4% from the previous year to $2.67.

Furthermore, LUV’s revenue and EPS for the next fiscal year (ending December 2024) are expected to grow 8.1% and 42.5% year-over-year to $28.75 billion and $3.81, respectively.

Discounted Valuation

In terms of forward non-GAAP P/E, LUV is trading at 13.45x, 21.5% lower than the industry average of 17.14x. Its forward EV/EBITDA multiple of 5.55 is 49% lower than the industry average of 10.88x. In addition, the stock’s forward Price/Book of 1.82x is 29.3% lower than the industry average of 2.58x.

Mixed Profitability

LUV’s trailing-12-month CAPEX/Sales of 18.06% is 532.3% higher than the 2.86% industry average. Additionally, its cash from operations of $3.42 billion compares to the $217.77 million industry average.

However, the stock’s trailing-12-month gross profit margin of 24.58% is 17.6% lower than the industry average of 29.83%, while its trailing-12-month EBITDA margin of 8.56% is 36.6% lower than the industry average of 13.50%.

POWR Ratings Show Promise

LUV’s fundamentals are reflected in its POWR Ratings. The stock has an overall rating of C, which equates to Neutral in our proprietary rating system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. LUV has a B grade for Momentum. This is justified as the stock trades above its 50-day and 200-day moving averages of $31.04 and $33.83, respectively. Also, the stock has a C grade for Growth, justifying its mixed past growth record.

LUV is ranked #20 in the A-rated 28-stock Airlines industry. Click here to access LUV’s Value, Stability, Sentiment, and Quality ratings.

View all the top stocks in the Airlines industry here.

Bottom Line

Despite incurring a net loss in the fiscal first quarter, Southwest Airlines (LUV) achieved record revenues. The company foresees solid profits in the second quarter and the full year with strategic investments in Southwest Business and expansion into Global Distribution Systems.

While financials and profitability might not be up to the mark, the company’s momentum and outlook remain sound. Therefore, we think waiting for a better entry point in LUV could be wise.

How Does Southwest Airlines Co. (LUV) Stack Up Against Its Peers?

While LUV has an overall POWR Rating of C, equating to Neutral, one could also check out other stocks within the Airlines industry that are overall A (Strong Buy) rated: Singapore Airlines Limited (SINGY - Get Rating), Qantas Airways Limited (QABSY - Get Rating), Air France-KLM SA (AFLYY - Get Rating).

What To Do Next?

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LUV shares were trading at $36.11 per share on Friday morning, up $0.16 (+0.45%). Year-to-date, LUV has gained 8.95%, versus a 16.55% rise in the benchmark S&P 500 index during the same period.

About the Author: Aanchal Sugandh

Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns. More...

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