Southwest: The One Airline to Buy Now

10/25/2017 5:00 am EST


Crista Huff

Editor, Cabot Undervalued Stocks Advisor

After a dismal airline profit situation in 2017, in which only one of the major U.S. players is set to see a profit increase, the industry is looking forward to a decisive turnaround in 2018, asserts Crista Huff, editor of Cabot Undervalued Growth Stocks Advisor.

One company’s numbers will soar above all its peers. That company is Southwest Airlines (LUV). It’s the one airline stock to buy now.

Southwest transports over 115 million customers annually to over 100 locations in the U.S., Central America and the Caribbean. The company is based in Dallas and has 55,000 employees.

On October 11, Southwest announced its intention to begin service to Hawaii in 2018. In other recent news, Southwest launched service utilizing the Boeing 737 MAX 8 aircraft in October—the first among its airline peers to do so.

The company will report third-quarter results on the morning of October 26. Wall Street consensus estimates point to third-quarter earnings per share (EPS) of $0.87, with a range of $0.81 to $1.00.

The company saw four consecutive years of aggressive earnings growth grind to a halt in 2016, when non-GAAP earnings per share (EPS) rose just 6.5%. Current-year numbers are lackluster, with 2017 EPS expected to fall 3.5%.

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The airline is in good company, though, because most of its peers are also seeing their 2017 profits fall. On the bright side, airlines are expected to see modest profit growth in 2018. Southwest, however, is expected to accomplish a whopping 24.6% EPS increase in 2018. That’s a number that will attract both institutional and individual investors.

The other key numbers also look great. The 2018 price/earnings ratio (P/E) is a low 13.0, and the most recent long-term debt-to-capitalization ratio is also low at 24%.

Southwest has better prospects for profit growth than all its U.S. peers, and a lower P/E and debt ratio than the vast majority of them. No matter how they slice and dice the numbers, LUV is going to rise to the top of analysts’ lists of top stocks among airlines.

LUV is an excellent stock for long-term growth investors, with a wide enough trading range to also accommodate traders. Buy LUV this fall to capitalize on its 2018 successes.

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