Southwest Airlines Co. (NYSE: LUV) is now sometimes considered a discount carrier and sometimes considered a legacy carrier, but it still has among the most loyal customer base and it seems to be the most likely to remain profitable in good times and bad.  The recent market turmoil has created a situation where Southwest shares have sold off too much.  Perhaps way too much.  Does that mean shares cannot slide further? No, but the current price is getting to be where the risk-reward parameters are more and more in the favor of long-term investors.

Another airline that is also cheap and oversold is United Continental Holdings, Inc. (NYSE: UAL), but it is expected to only have breakeven earnings in the March quarter while Southwest is expected to be profitable in the current December and the coming March quarters. Companies like US Airways Group, Inc. (NYSE: LCC) and Delta Air Lines Inc. (NYSE: DAL) are both expected to have an operating loss in at least one of the next two quarterly reports.  The rumor mill also has many investors worried of a potential bankruptcy at AMR Corporation (NYSE: AMR).  JetBlue Airways Corporation (NASDAQ: JBLU) is attractive on valuations as well, but its problems seem to keep working against it even if its Northeast-dominance leaves it more subject to adverse weather conditions than most rivals. This leaves Southwest as the best of class among the large air carriers even if these other stocks also look oversold on their charts.
 
Southwest remains the most passenger-friendly large air carrier in the sky.  The company is also still digesting the acquisition of Airtran and it is now much more subject to the price of jet fuel that it was from 2006 to 2008.  Shares sold off from $12 to $8 during the summer sell-off and shares went well under $8 during the peak selling in late-September and early October.  After a recover, shares slid from $8.50 just about two weeks ago to end up at $7.73 most recently. 

The airline still sports a relatively young fleet and it still has perhaps the best safety record despite some less than headline-friendly in the last few years.  The company pays only a 0.2% dividend yield, but that is actually one of the few dividends in the airline sector.  With what may be more predictable earnings than peers, we view Southwest as the one airline that wants to be dividend-friendly in the years ahead.

We would consider the current $12.21 consensus analyst target from Thomson Reuters now artificially high even if the 52-week trading range is $7.15 to $13.77 versus a $7.73 price today.  In fact, that target price is high enough that we are even considering that analysts will lower their price targets ahead.  The stock is now trading under its stated book value and it trades at only about 1.1-times tangible book value.  And if it meets Thomson Reuters estimates, then the stock trades at 19-times 2011 and under 10-times 2012 expected earnings. Southwest should recover considerably unless the market tanks or unless an unforseen event occurs. 

We would note, Southwest has what is close to a net-zero exposure to Europe.  The only thing not in its favor is that hedging gasoline prices like it did in years past has been far less prevalent.  The company also has a better labor situation compared to other airlines. 

This was one of seven oversold picks poised for a comeback which was offered recently to our readers who sign up for our free daily newsletter service.  Each morning’s free newsletter is sent by email and includes the top news headlines, shows the top 15 or so analyst upgrades and downgrades, covers activist investor and insider trading, and offer key trading alerts for investors. Sign up in the box below.

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