Southwest Airlines Earnings Preview

Apr.23.14 | About: Southwest Airlines (LUV)

Summary

Southwest is set to announce its quarterly earning report on April 24th.

EPS is projected at .17 for the first quarter of '14, up from .07 in Q1 of 2013.

Southwest is likely to continue on its upward trend.

Southwest Airlines (NYSE:LUV) will release its 1st Quarter Earnings Report on Thursday, April 24th. The company is coming off of record numbers in the fourth quarter of last year, and a year that saw the stock price rise 84% in total. Here's a view of Southwest against the benchmark for the past year:

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What to Expect for Q1 '14

Earnings per share for Q1 of 2014 are projected to be up 112% to $.17, according to FactSet, up from $.07 in the first quarter of last year. This boost will help lead Southwest towards its projected 2014 EPS of $1.42, which would be up 35% from 2013's value of $1.05.

Operating revenues for Q1 are also projected to be 2.1% up to 4.2 billion, compared to Q1 of '13. In addition to this, net income is expected to have increased 95% to $115 million compared to the first quarter of last year.

DCF and Analysis

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I'm extremely encouraged about the potential future of Southwest, after completing a DCF. Even while using relatively modest rates for predictions, the stock's predicted value per share shows an increase to $27.72. I chose a sales growth rate of 5% to demonstrate a worst-case scenario type of situation- Southwest's average sales growth rate for the past 7 years has been 12.13%, and the company seems to be on pace to follow this trend. If growth rates remain around the 10% range, the predicted value per share sky rockets into the mid-to-high 30s range. I also chose to use a much higher cash tax rate than the average for the past years of data listed. I chose to do this because of the uncertainty surrounding the future of the corporate tax structure. Should taxes for Southwest stay where they are, a value in the mid-$30 range become even more feasible. Two other big factors in the final predicted value per share of this DCF are the WACC and the long-term growth rate. Although unlikely, if Southwest's weighted average cost of capital increases, the predicted value per share could plummet. On the other hand, if the economy grows at a rate better than 3%, this particular DCF shows that the stock price could eclipse the $40 range.

DCF's aren't always accurate, but I'm particularly confident in this model. What I consider to be pretty modest assumptions for this model still yields a noteworthy increase in the share price. Make of it what you will, but Southwest has the potential to soar higher, should it keep even a fraction of its current pace intact.

Sources:

FactSet

Southwest Investor Relations Interactive Chart

Southwest 2014 4th Quarter Earnings Report

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in LUV over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.