SWAdude
Well-known member
- Joined
- Nov 3, 2003
- Posts
- 634
RAYMOND JAMES
Southwest Airlines Co. Upgrade
(LUV:NYSE) Outperform 2
Founded in 1971 and headquartered in Dallas, Texas, Southwest Airlines
Company (www.southwest.com) is the original and premier low cost carrier
(LCC). Southwest serves 58 cities throughout the U.S. and had a fleet of 388
Boeing (BA/$44.49) 737 jet aircraft on December 31, 2003.
LUV- Raising Rating To Outperform
?LUV’s rating is being upgraded from Market Perform to Outperform.
LUV’s share price declined sharply in 4Q03 primarily due to
downward revisions to EPS estimates during the quarter. LUV
shares have continued to decline in 2004 as well, we believe, due to
the negative sentiment surrounding the legacy carriers’ more
aggressive competitive responses against LCC intrusions into their
markets. However, the negative sentiment, in our opinion, has
peaked because:
(1) Song, which was created by Delta to compete in the LCC sector, is
performing poorly, as was detailed in our research brief on JBLU
dated 2/9/04. Delta recently stated that it is placing Song’s growth
plans on hold, which, we believe, is further evidence of Song’s poor
performance. Song impacts LUV’s Northeast to Florida traffic.
(2) American’s “buy 2, get 1 free” roundtrip fare sale, which was joined
by United and Delta in JBLU’s markets, expires 4/14/04 and does
not appear to have been effective in taking any substantial amount
of traffic from LCCs. Of the 150,000 passengers that have
participated in American’s free ticket promotion, only 13,000 or 9%
are new customers.
Historically, legacy carriers have not had success competing against
LUV, which, we believe, is the reason the legacy carriers have
recently targeted other LCCs-JBLU in particular.
(3) The legacy carriers’ recent initiatives to bring back capacity in
competition with the LCCs, we think, are exacerbating their own
poor financial performance.
?However, it should be noted that from time to time the legacy
carriers will come up with new competitive initiatives targeted at the
LCCs, which we think will cause short-term, negative aberrations in
their generally rapidly growing longer-term EPS streams.
?Moreover, among U.S. legacy and low cost airlines, LUV is far more
insulated with respect to fuel price volatility since it has 83% of its
fuel requirements hedged for 2004. In addition, it has the best
balance sheet in the industry with cash and cash equivalents of $1.9
billion at 12/31/03. We are establishing a price target of $18, which
is based on 24x our 2005 EPS estimate of $0.75.
EPS Q1 Q2 Q3 Q4 Full
FY= Dec Mar Jun Sep Dec Year
2003A $0.03 $0.13 $0.13 $0.08 $0.36
Old 2004E 0.05 0.17 0.16 0.14 0.52
New 2004E 0.05 0.17 0.16 0.14 0.52
Old 2005E UR UR UR UR 0.75
New 2005E UR UR UR UR 0.75
Notes: Rows may not add due to rounding. UR: Under Review.
Please read Investment Risks/Analyst Certification on page 2 and disclosure information on page 3.
EQUITY
RESEARCH
February 12, 2004
Growth Airlines
Company Comment
James D. Parker, Ph.D.
(404) 442-5857
[email protected]
Samantha Panella
(212) 297-5654
[email protected]
Kristi Steed, Res. Assoc.
Kameko Nichols, Industry
Statistician
Current Price
(2/11/04) $14.64
Projected 12-Month Target Price:
Old: NM New: $18.00
52-Week Range $19.69-$11.72
Dividend/Yield $0.02/0.1%
Book Value (12/03) $6.06
Suitability Aggressive Growth
Shares Out. (mil.) 833.0
Market Cap. (mil.) $12195.1
Avg. Daily Vol. (10 day) 4,485,630
Proj. 3-Yr EPS Growth Rate 38%
ROE (2003A) 6.3%
LT Debt (mil.)/% Cap. $1332/21%
P/E Ratios
2004E 28.2x
2005E 19.5x
Revenues (mil.)
Old New
2003A $5,936 $5,936
2004E $6,541 $6,541
2005E $7,464 $7,464
Southwest Airlines Co. Upgrade
(LUV:NYSE) Outperform 2
Founded in 1971 and headquartered in Dallas, Texas, Southwest Airlines
Company (www.southwest.com) is the original and premier low cost carrier
(LCC). Southwest serves 58 cities throughout the U.S. and had a fleet of 388
Boeing (BA/$44.49) 737 jet aircraft on December 31, 2003.
LUV- Raising Rating To Outperform
?LUV’s rating is being upgraded from Market Perform to Outperform.
LUV’s share price declined sharply in 4Q03 primarily due to
downward revisions to EPS estimates during the quarter. LUV
shares have continued to decline in 2004 as well, we believe, due to
the negative sentiment surrounding the legacy carriers’ more
aggressive competitive responses against LCC intrusions into their
markets. However, the negative sentiment, in our opinion, has
peaked because:
(1) Song, which was created by Delta to compete in the LCC sector, is
performing poorly, as was detailed in our research brief on JBLU
dated 2/9/04. Delta recently stated that it is placing Song’s growth
plans on hold, which, we believe, is further evidence of Song’s poor
performance. Song impacts LUV’s Northeast to Florida traffic.
(2) American’s “buy 2, get 1 free” roundtrip fare sale, which was joined
by United and Delta in JBLU’s markets, expires 4/14/04 and does
not appear to have been effective in taking any substantial amount
of traffic from LCCs. Of the 150,000 passengers that have
participated in American’s free ticket promotion, only 13,000 or 9%
are new customers.
Historically, legacy carriers have not had success competing against
LUV, which, we believe, is the reason the legacy carriers have
recently targeted other LCCs-JBLU in particular.
(3) The legacy carriers’ recent initiatives to bring back capacity in
competition with the LCCs, we think, are exacerbating their own
poor financial performance.
?However, it should be noted that from time to time the legacy
carriers will come up with new competitive initiatives targeted at the
LCCs, which we think will cause short-term, negative aberrations in
their generally rapidly growing longer-term EPS streams.
?Moreover, among U.S. legacy and low cost airlines, LUV is far more
insulated with respect to fuel price volatility since it has 83% of its
fuel requirements hedged for 2004. In addition, it has the best
balance sheet in the industry with cash and cash equivalents of $1.9
billion at 12/31/03. We are establishing a price target of $18, which
is based on 24x our 2005 EPS estimate of $0.75.
EPS Q1 Q2 Q3 Q4 Full
FY= Dec Mar Jun Sep Dec Year
2003A $0.03 $0.13 $0.13 $0.08 $0.36
Old 2004E 0.05 0.17 0.16 0.14 0.52
New 2004E 0.05 0.17 0.16 0.14 0.52
Old 2005E UR UR UR UR 0.75
New 2005E UR UR UR UR 0.75
Notes: Rows may not add due to rounding. UR: Under Review.
Please read Investment Risks/Analyst Certification on page 2 and disclosure information on page 3.
EQUITY
RESEARCH
February 12, 2004
Growth Airlines
Company Comment
James D. Parker, Ph.D.
(404) 442-5857
[email protected]
Samantha Panella
(212) 297-5654
[email protected]
Kristi Steed, Res. Assoc.
Kameko Nichols, Industry
Statistician
Current Price
(2/11/04) $14.64
Projected 12-Month Target Price:
Old: NM New: $18.00
52-Week Range $19.69-$11.72
Dividend/Yield $0.02/0.1%
Book Value (12/03) $6.06
Suitability Aggressive Growth
Shares Out. (mil.) 833.0
Market Cap. (mil.) $12195.1
Avg. Daily Vol. (10 day) 4,485,630
Proj. 3-Yr EPS Growth Rate 38%
ROE (2003A) 6.3%
LT Debt (mil.)/% Cap. $1332/21%
P/E Ratios
2004E 28.2x
2005E 19.5x
Revenues (mil.)
Old New
2003A $5,936 $5,936
2004E $6,541 $6,541
2005E $7,464 $7,464
