Our research on the 2nd stock pick from surf shack LUV
Rapidly dropping fuel prices sparked my interest in the airline business this week.
Despite the gloomy economic climate, people are still traveling for business and pleasure. It was my contention that airline and other transportation companies will be benefiting from the steeply falling fuel costs. Airlines have been hit hard this century with the 9/11 disaster and recently out of control increases in the price of fuel.
I deduced that the low priced, discount airlines would most likely be the first to benefit from the falling fuel costs. Customers are bargain hungry in this environment, constantly searching for the best deal, and these airlines offer, sometimes shockingly low rates. The question would be, what low priced airline stock possesses the best chance of price appreciation in the sector?
Recalling a marketing class in college, in which I did a case study on a small, highly innovative, and creative airline named Southwest Airlines (NYSE:LUV - News), I decided to take a closer look at this now major player in the airline space. The company sits at number 7 in the top 10 highest ranked low priced Long Term PowerRating stocks. It is the number one rated stock in its sector, earning a 4 Long Term PowerRating.
For those of you not familiar with our Long Term PowerRating, it is an easy to use, dynamic stock picking system based on 12 years of extensive, statistically significant studies, across most market environments. Our research has clearly shown that stocks that earn a 10 rating have an 81% chance of being higher one year later. Those possessing a 9 rating have a 79.1% chance of trading higher one year later. In this volatile, uncertain market environment, allow Long Term Power Ratings to assist you in building a profitable and safe portfolio.
Southwest Airlines began in the early 1970's in Texas with a mission to provide low fares and a fun experience in the sky. By 1974, this small regional airline had flown one million passengers and began to spread throughout Texas with 6 Boeing 737's. The company grew rapidly and was listed on the NYSE in 1977 under the ticker symbol LUV.
Their original, innovative, creative marketing and good time party like atmosphere in the sky made them a favorite with many travelers. The company currently flies 104 million passengers to 64 cities yearly on its fleet of over 500 jets. It is continuing to constantly innovate and be a leader in the field. Several recent examples include offering customers tickets to the sold out Las Vegas de la Hoya boxing match, a 3 day winter fare sale, and providing extra flights to the 2009 Presidential inauguration.
In the airline business, there is a metric called Revenue Passenger Miles or RPM for short. The RPM for Southwest in October 2007 was 6.0 billion and increased to 6.2 billion in October 2008. Another unique metric to the industry, Available Seat Miles or ASM increased 2.9% over the same time last year. They just reported their 70th consecutive quarterly operating profit and declared its 129th consecutive quarterly dividend.
Unfortunately, the company took what seemed to be prudent steps earlier in the year by hedging its fuel costs, basically locking in 75% of their fuel costs at $73.00/barrel for 2009. This hedging saved the company $1.3 billion up until September, 2008. However, the recent steeply lower fuel costs will not fully benefit the company until these hedges can be unwound. However, as of October, the hedges remained "in the money" per the company. Technically, price has fallen steeply over the last several months. However, it appears to be basing in the $7.00 to $8.00 price range and may be setting up for an assault on the 50-day Simple Moving Average currently at $10.67.
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