Key Points
Southwest missed on sales and earnings last night.
Revenues slipped only slightly year over year, but profits were down a big 33%.
Southwest has announced a buyback of its stock, forecasting better profits ahead.
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Southwest Airlines (NYSE: LUV) stock crashed 11.9% through 11:30 a.m. ET Thursday after missing analyst targets for both sales and earnings last night.
Heading into the Q2 report, Wall Street expected the airline to report at least $0.51 per share in adjusted profit on quarterly sales of $7.29 billion. Southwest said earnings were actually only $0.43, however, and sales were only $7.24 billion.
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Image source: Southwest Airlines.
Southwest Airlines Q2 earnings
It gets worse. The $0.43 was what Southwest would have earned but for “one-time” expenses. But actual earnings as calculated according to generally accepted accounting principles (GAAP) were only $0.39 per share, down 33% from one year ago, and on a revenue decline of only 1.5%!
So clearly Southwest’s profit margins declined, but why?
Fuel costs fell dramatically from Q2 2024, so that wasn’t the problem. Salaries, wages, and benefits, on the other hand, grew 9%, and landing fees were up 11%. These were the two biggest changes dragging down results — and not even Southwest’s unpopular decision to start charging extra for luggage was enough to offset them.
Is Southwest stock a sell?
Turning to guidance, Southwest says it will earn at least $600 million this year, not counting interest on its debt and taxes. With this prospect in mind, management thinks its stock a bargain, and announced a $2 billion stock buyback (which will see even more shares retired after today’s sell-off).
But is buying Southwest stock a good idea?
Priced at 39x earnings, the stock looks expensive. Still, earnings growth could be robust, with analysts forecasting doubled profits next year — $2.25 per share — and more growth beyond that.
At 15 times forward earnings, no net debt, and paying a respectable 1.9% dividend yield, Southwest stock could be a “buy” in the making.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Southwest Airlines. The Motley Fool has a disclosure policy.
