Southwest: LUV Is in the Air

03/30/2015 7:00 am EST

Focus: STOCKS

Roy Ward

Chief Analyst, Cabot Benjamin Graham Value Investor

Our latest featured value stock recommendation is an airline that consistently offers the lowest fares in the industry and does not charge extra fees, suggests J. Royden Ward, editor of Cabot Benjamin Graham Value Investor.

Southwest Airlines (LUV) operates Southwest Airlines and AirTran Airways, which provide air transportation within the US and other countries nearby.

Southwest does not operate from a hub, but offers point-to-point service with non-stop routing.  It also provides short-haul, high frequency flights to many secondary or downtown airports throughout the US.

AirTran, however, operates through a hub-and-spoke network with flights originating and terminating at Hartsfield-Jackson Atlanta International Airport. AirTran provides service to cities within the US as well as international markets.

The company will expand AirTran’s international operations by flying to four new destinations in Mexico and offering additional flights to other Latin American countries.

Other expansion efforts include enlarging the company’s jet fleet, adding 29 terminal slots in Dallas, New York City, and Washington, DC, and adding many new flights.

Fourth quarter spending on fuel declined 15% and could decline even more during the next couple of quarters, according to management.

Revenues increased 6% in 2014 and will likely rise 6% again in 2015. EPS surged 63% in 2014 and could soar 60% in 2015.

Revenues could exceed my forecast if new routes materialize ahead of management’s current plans. At 21.9 times current EPS, and with a dividend yield of 0.6%, LUV shares appear to be expensive.

However, surging earnings and an expected boost in the dividend bodes well for the stock. I expect LUV to reach my minimum sell price target of $57.63 within one year. Buy at the current price.

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