Southwest Airlines Co.: LUV October 5th, 2017 Colin Warner Performance Analyst Emily Rees Special Events Coordinator Kate Linn Private Equity Analyst Jack Thompson Latin American Economist
Table of Contents Investment Thesis Technical Analysis Company Overview & History Competitors Key Executives Fundamental Analysis Recent News SWOT Analysis Company Strategy Summary Markets Recommendation
Investment Thesis
Investment Thesis The airline industry is undervalued; Southwest Airlines is more undervalued than its competitors. We believe that the labor cost headwinds will be outweighed by the oil cost tailwinds. The company is safe during times of recession and attractive during times of growth, which is why we think that Southwest would make a great investment.
Company Overview & History
Company Overview In its 47th year of service Dallas-based Exemplary Customer Service more than 55,000 Employees and more than 115 million Customers annually Southwest became the nation s largest domestic air carrier in 2003 and maintains that ranking based on the U.S. Department of Transportation Southwest operates more than 4,000 departures a day 99 destinations in the United States and 9 additional countries Philosophy of treating customers honestly and fairly Reliably low and uniquely flexible fares Only major U.S. airline to offer (2) bags fly free to everyone Operates the largest fleet in the world of Boeing Since 2010, Southwest has returned more than $7.1 billion to Shareholders through share repurchases and dividends
Company History 1966: Founded by Rollin King and Herbert Kelleher 1971: Began scheduled flights, from Dallas Love Field to local destinations 1975: Went public on the American Stock Exchange 1978: Airline Deregulation Act 1979: First flights outside Texas 1990: Revenues exceed 1 billion for the first time 1995: First airline to use web scheduling 2011: Acquired AirTran
Key Executives
Governance Tom Nealon President Prior experience: Group Executive VP, JC Penney, VP & CIO at Frito Lay Gary C Kelly Chairman of the Board and CEO 30 Year Southwest Veteran Mike Van de Ven COO,Senior VP, Global Operations Joined SouthWest in 1993
Recent News
Recent News September 24, 2017 New ad campaign revealed September 28, 2017 Southwest cuts revenue guidance in wake of hurricanes October 1, 2017 The Southwest effect on flights to Hawaii October 2, 2017 JP Morgan recommends Southwest as the safest bet in the airline industry
Company Strategy
Company Strategy Robust Route Network: Carry the most passengers in the U.S. Most daily departures in the world Serve more than half of the top 50 U.S. metro areas Significant growth opportunities, including near-international Compelling Brand Appeal: Best People in the airline industry Outstanding Customer Service and Hospitality Low fares with Transfarency Industry-leading frequent flyer program Superior Financial Position: 44 consecutive years of profitability Competitive cost advantage Commitment to return value to Shareholders
Markets
Market Presence Largest domestic market share Based on sales Ranked highest in customer satisfaction among major airlines JD Power and Associates survey of 11, 005 passengers Specialize in domestic market Helps keep costs low
Key Cost Factors Oil Prices OPEC Production US Oil Reserves Capital Spending Increase Demand Factors Wages Unemployment Unionized Automation
Market Cycles Current market Low unemployment Monetary tightening Very long recovery Strong during growth Higher discretionary income Safe during recessions Low cost strategy Target market Growth % Green: Delta Orange: American
Technical Analysis
Technicals
Competitors
Competitors Delta: American Airlines: Business travelers Recent Fare hikes Largest by enterprise value and ASM Looking to offset weakening U.S. demand & Extremely vulnerable to fuel prices effects of low-cost competition by expanding Second largest airline in the world Fleet is 15 years old, working on deal with Boeing to replace entire fleet int l (35% revs) H&S in ATL, Cincy, NYC Jetblue: 6th largest domestic airline Point-to-point travel Young fleet of planes United Airlines: Holding company consisting of United Airlines and Continental Airlines Hub-and-spoke system Operates internationally Biggest airline in the world after merger
LUV vs. competitors
Multiples Analysis vs. Competitors Company LUV JBLU AAL DAL UAL Market Cap $35.42B $6.48B $25.07B $37.51B $19.85B P/E (trail) 18.14x 10x 12.78x 10.31x 9.02x Beta 1.13.33 1.34.94 1.11 DY.73% N.A.79% 1.58% N.A Op mgn. 18.17% 16.88% 12.68% 14.09% 11.81% OER 81.59% 83.87% 82.46% 85.95% 88.13% Profit mgn. 10.99% 9.78% 5.02% 9.3% 6.09% Short% float 1.59% 3.68% 8.67% 0% 4.39% *Revenue passenger miles = Revenues * number of revenue-paying passengers
Multiples Analysis vs. Competitors Company LUV JBLU AAL DAL UAL Fuel & labor as % of revs 51.14% 41.8% 38.26% 38.26% 44.01% $Fuel/gallon $1.92 $2.54 $1.42 $2.13 $1.49 Full-time e s 53,536 20,000 122,300 83,756 48,250 Stage length 760 1089.6 x x 1,473 Load Factor 81% 84.26% 81.7% 84.60% 82.90% RPMs 124.8B 38.91B 199.01 202.72B 186.18B PRASM/CASM 1.33 1.05 1.06 1.03 1.05 Yield/Pmile $0.157 $0.138 $.155 $.159 $.150 ASM = Number of seats filled*number of miles flown *Revenue passenger miles = Revenues * number of revenue-paying passengers
Fundamental Analysis
Financial Highlights
Financial Highlights
Model
SWOT Analysis
Strengths: LCC Advantage RFIDs Keep Checked Bags in Check 4.5 per k Hub Avoidance Convenience Bags fly free Oil Hedging SWOT Analysis Weaknesses: Strong Competitors Hub Avoidance Domestic Declines Skype, etc. easing long-distance comm. Lack of Luxury Average Fares Opportunities: Automation Implications Fracking Implications Global Affordability Approaching new destinations Caribbean Threats: Labor Costs Soaring Fuel Costs Soaring $.01 change? Add $7mil to yearly bill. Contractionary Consequences Luxury Airliners Lowering Costs Could cause some turbulence
Summary
Summary - - - High market share that should increase - Unique business model - Low cost strategy - Excellent customer service - Reliable/direct travel Low risk - Oil price hedging - 44 years of profitability - Little reaction to big events - Little negative press/few scandals Value - Well positioned to take advantage of any scenario - Trading below our model and analyst estimates
Recommendation
Recommendation (1) Sell 656 Shares of PBI at $14.04 for $9210.24 (2) Purchase 231 shares of LUV at $58.00 Total Investment of $13,398.00 Approximately 8% of the portfolio
Portfolio Allocation
Portfolio Allocation NEE ANDV TGT CTL BSX CVS DEO BAC PBI Portfolio. % 18% 14% 14% 11% 11% 9% 9% 7% 7% 100% Basis $24,216 $19,447 $18,712 $15,469 $14,853 $12,971 $11,965 $10,026 $9,170 $135,602 Sept. r s -2.63% +3.00% +8.22% -4.16% +3.37% +5.15% -1.96% +.01% +9.03% 2.12% PTD r s +17.72% +20.64% -18.92% -22.74% +21.37% +1.99% -1.38% +.01% -7.67% 8.98%
PBI Originally purchased 656 shares at: $14.50 Today s price: $14.00 Original Investment Thesis: 52 week low Expansion of ecommerce and cloud based services Competitive dividend yield
Thank you for your time. We now welcome all questions and concerns.