RealMoney Silver - Insider Purchases & Buybacks: LUV

Insider Purchases & Buybacks: LUV
By Jason Raznick
RealMoney.com Contributor
1/30/2008 3:36 PM EST

While a buyback is a good sign, it is not always an indicator for you to make investment in a company. Checking out the company's fundamentals and its outlook is a must. Despite Southwest Airlines' (LUV) recently announced buyback, I don't believe it's time for this stock. (On Stockpickr, you can see the rest of the insider trades and buybacks portfolio).

Southwest's board approved a buyback plan worth up to $500 million, representing about 41 million shares, or about 5.5% of all outstanding shares, at the closing price on Jan. 30. The company has repurchased 116 million shares for a total of $1.8 billion over the past two years.

Southwest doubled its profits in the fourth quarter of 2007 to $111 million, or 15 cents a share. Excluding one-time items, the company would have earned 12 cents a share, ahead of the Wall Street expectations. The Dallas-based carrier would have recorded a loss had it not been for its smart hedging against rising fuel costs, which helped it save $300 million.

CEO Gary Kelly warned, however, that Southwest could be in the red in the first quarter of 2008 on account of fuel costs, which is an airline's second-largest expense after labor. Southwest has options to buy more than 70% of its fuel at a highly discounted price of about $51 a barrel of oil this year. JPMorgan analyst Jamie Baker said, though, that the company would need to generate significant revenue growth in 2008 to meet market expectations for profits, despite the hedging options.

Michael Derchin, managing director and senior transportation analyst of FTN Midwest Securities, said in an interview with The Wall Street Transcript that the airline industry may undergo consolidation in early 2008. "Valuations are very attractive at these levels, and we can see many of our favorite names doubling over the next two years," Derchin added.

Apart from consolidation, Derchin pointed out two other catalysts for the airline industry. First, there's a bubble in oil, with prices higher than $90 a barrel, as compared to $60-$70 a barrel based on demand and supply. This bubble could burst. There is a good chance of revenue growth in the first half of next year being in the double-digit range.

You could see the list of investment funds that own Southwest on Stockpickr. Manning & Napier Pro-Blend Consrv Term A (EXDAX) recently raised its stake in the company. Managed by Jeffrey Coons, the fund has a Morningstar rating of four stars. It also holds Wachovia (WB) , Boston Scientific (BSX) and Unilever (UL) .

There are some smart funds that have reduced their stakes in Southwest, however. These include:

T. Rowe Price Value (TRVLX): Run by John Linehan, this fund has a Morningstar rating of four stars. It has five-year annualized returns of 14.71% and also holds General Electric (GE) and Microsoft (MSFT) .

Farallon Capital Management LLC: This $10 billion fund also holds CapitalSource (CSE) and Harrah's Entertainment (HET) .

Vanguard PrimeCap Core (VPCCX): Managed by Joel Fried, this fund has three-year annualized returns of 12.69%. It also holds Eli Lilly (LLY) and Medtronic (MDT) .

Although I expect some commodities to fall in value, I don't expect oil prices to decline significantly. While carriers have been indicating strong demand, Southwest may find it difficult to pass on its high fuel and maintenance costs to the customer against the backdrop of an economic slowdown. Moreover, there is stiff competition in the airline industry.

(On Stockpickr, you can see the rest of the insider trades and buybacks).