SOUTHWEST AIRLINES TRYING TO SET A SHORT-TERM LOW – TIME FOR A BOUNCE?

Southwest Airlines

stock has been in a miserable downtrend since making a March peak at around $46. The stock has plummeted from $46 all the way down to a low of $33.82 last Tuesday. Since bottoming last week, though, LUV shares have seemingly been trying to base and stage a bounce. Technicians are already calling whatever upside occurs in the short-term for LUV a "bounce" and not the beginning of a new up leg. Can the terrific management at Southwest make enough magic happen to boost the shares – regardless of what happens with crude oil prices? Let's take a look at LUV from both a fundamental and technical perspective to get an idea of what may be in store for shareholders… What the bulls see in Southwest Airlines… • A price-to-sales ratio of only 1.24 • Net profit margins of 7.62% that spin off $1.33 billion in positive levered free cash flows annually • Good management effectiveness metrics: o Return on assets of 8.76% o Return on equity of 20.40% • Good balance sheet metrics: o Cash of $3.44 billion versus only $2.75 billion in total debt o A debt-to-equity ratio of only 39.81% • An annual dividend ratio of 0.70% What the bears see in Southwest Airlines… • Some expensive valuation metrics: o A PE ratio of 10 versus estimated revenue and EPS growth of 6.3% and 1% respectively for the next year. o A market capitalization of $22.98 billion versus an estimated enterprise value of $22.7 billion o A price-to-book ratio of 3.39 • A current ratio of 0.72 The technical take on LUV… Technicians note that Southwest Airlines shares may have set a bottom in the short-term and could bounce up to either $37.90 or $40.04 – both of which are Fibonacci retracement levels (retracements of the April 24th to June 10th down leg). A move up to one of those two levels could coincide with a test of the downtrend line shown on the daily LUV chart – depending on the timing and duration of the up move. Overall… Southwest may be a technical long candidate at the current level – but the downtrend is to be respected. If crude oil drops from current levels, LUV may well be a major beneficiary in the short-term. We will see if the company's fundamentals can add fuel to the short-term spike that may be created by a drop in oil.