A Great Call Option Play For Bullish Investors

| About: Southwest Airlines (LUV)

Southwest Airlines (NYSE:LUV) is a fantastic equity play for medium- and long-term investors. The stock has moved up with the market in the last few months and, I believe, will realize significant value gains and reach the $10 level again before 2013 rolls in. Here's why I'm still bullish on LUV:

Southwest is the fourth-largest U.S. airline that offers discount fares and great value to customers, not to mention first-rate customer service. Granted, the U.S. airline industry and global airlines in general are not the most promising area for investment, but this simply means that more opportunities for undervaluation exist given that many investors will simply look elsewhere and ignore all airline plays in equities and options.

The 52-week range is $7.15-$10.05, the high reached shortly after the announcement of a quarterly dividend earlier this year. Dividend per share is $0.04, coming to a decent annual dividend yield of 0.44%. Beta stands at 1.08, market cap is just at $6.7 billion, and revenue, net income, and EPS growth in the last quarter are at a beautiful 11.6%, 42.2%, and 42.9% respectively. The revenue growth has translated to EPS growth, signaling competent management and a focus on creating shareholder value. Net profit margin stands at 5%, higher than the industry average.

Especially when examined next to competitors in the airline sector such as Delta (NYSE:DAL), United Continental (NYSE:UAL), Alaska Air Group (NYSE:ALK), US Airways (LCC), Spirit (NASDAQ:SAVE), JetBlue (NASDAQ:JBLU), Allegiant (NASDAQ:ALGT), RyanAir (NASDAQ:RYAAY), and others, Southwest looks like a fantastic deal not only for short-term speculators but also for longer-term value investors. While some airlines are risky investments right now, Southwest's recent route expansions, public image improvements, emphasis on low fares and good customer service, and simple procedures and policies all translate to an effective business model.

Growth prospects are good, and the company's financial metrics are outstanding. Synergies from the AirTran acquisition have not yet been fully realized, making for a compelling bullish case. Granted, downside risk could stem from a failure to realize these revenue and expense synergies, a price war with competitors, and/or weakening of demand for air travel if global and domestic macroeconomic conditions deteriorate further.

For now, though, I'm expecting to see LUV shares trading above $10 before year end, with a two-year price point above $15. I'll see what happens in the next month, but for now am holding onto my long options position and may accumulate some more contracts in the next days and weeks. Here's the one I recommend if you share my convictions:

  • LUV Jan 19 2013 10.0 Call has 135 days to expiration. On OPRA this afternoon, metrics for this contract were as follows: bid was 0.35, ask was 0.40, volume was 102, open interest 6,070, implied volatility 29.56 and time value 0.40.

Disclosure: I am long LUV. 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.

Additional disclosure: Long via LUV Jan 19 2013 10.0 Call. I may add to this position over the next 72 hours.

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Tagged: , , Regional Airlines, Options
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