Southwest Airlines (LUV) Soars on Downgraded Capacity Growth Expectations

NEW YORK (TheStreet) -- Southwest Airlines (LUV) shares are climbing 3% to $37.98 on heavy volume in afternoon trading on Monday after CEO Gary Kelly said that the airline would cap seating growth expansion at 7%, reversing earlier expectations of 8% growth.

"We don't want to grow 8%, we're not going to grow 8% and we can easily trim the schedule to stick to 7%," Kelly told Bloomberg.

The company previously said it expects seat capacity to grow between 7% and 8% this year, and between 6% and 7% next year.

As a result Southwest also forecast that PRASM, passenger revenue per available seat mile, a key indicator of airline profitability, will decline by about 3% year over year this quarter.

Other airline stocks have also gained today on Southwest's news with Delta (DAL) and American Airlines (AAL) up 3.66% and 4.48%, respectively. 

TheStreet Ratings team rates SOUTHWEST AIRLINES as a Buy with a ratings score of A+. TheStreet Ratings Team has this to say about their recommendation:

"We rate SOUTHWEST AIRLINES (LUV) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, impressive record of earnings per share growth, solid stock price performance, largely solid financial position with reasonable debt levels by most measures and notable return on equity. We feel its strengths outweigh the fact that the company shows low profit margins."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • LUV's revenue growth has slightly outpaced the industry average of 3.3%. Since the same quarter one year prior, revenues slightly increased by 6.0%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • SOUTHWEST AIRLINES reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, SOUTHWEST AIRLINES increased its bottom line by earning $1.65 versus $1.06 in the prior year. This year, the market expects an improvement in earnings ($3.45 versus $1.65).
  • Powered by its strong earnings growth of 200.00% and other important driving factors, this stock has surged by 39.27% over the past year, outperforming the rise in the S&P 500 Index during the same period. Looking ahead, the stock's sharp rise over the last year has already helped drive it to a level which is relatively expensive compared to the rest of its industry. We feel, however, that other strengths this company displays justify these higher price levels.
  • Net operating cash flow has increased to $1,452.00 million or 29.75% when compared to the same quarter last year. Despite an increase in cash flow, SOUTHWEST AIRLINES's cash flow growth rate is still lower than the industry average growth rate of 75.59%.
  • The current debt-to-equity ratio, 0.39, is low and is below the industry average, implying that there has been successful management of debt levels. Despite the fact that LUV's debt-to-equity ratio is low, the quick ratio, which is currently 0.57, displays a potential problem in covering short-term cash needs.
  • You can view the full analysis from the report here: LUV Ratings Report

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