Southwest a better airline than investment
Dear Mr. Berko:
You have often said that the best time to buy a stock is when no one wants it. Would the airlines qualify? I’m considering Southwest Airlines Co. or SkyWest Inc. I would buy either 200 shares of Southwest or 300 shares of SkyWest. Which would you recommend and why?
E.P., Portland, Ore.
Dear E.P.:
Back in the boom years before the bubble burst, when price-earnings ratios climbed into the stratosphere, the suits on Wall Street blithely told us that price-earnings ratios were dinosaurs in the New Economy.
The suits would have had us believe that the length of the inch had changed and that new yardsticks, including “price-to-cash-flow,” “price-to-sales” or “price-to-book,” were superior ways to measure a company’s true value. They tried to prove it.
Well, it appears that the price-earnings ratio, used by analysts since Noah built the ark, unquestionably provides the best results. According to Merrill Lynch & Co., investors who purchased the 50 stocks in the Standard & Poor’s 500 index that had the lowest trailing 12-month price-earnings ratios consistently produced better returns.
Between 1986 and 2002, those who bought the 50 lowest price-earnings issues trashed the other strategies by a landslide. The price-earnings strategy produced a 17.2 percent annualized return in that 17-year period. Meanwhile, the so-called new strategies of price-to-cash-flow, price-to-book and price-to-sales delivered 13.1 percent, 12.4 percent and 11.9 percent, respectively.
To confound the suits even more, if you bought the stocks of companies with the lowest forecast P/E, your annualized return over that 17-year time frame would have been 15.4 percent. This flies in the face of their advice to select issues on the basis of future profit projections and to ignore past results.
I really like Southwest Airlines Co. (LUV-$15.89), which hasn’t lost a wooden nickel or a silver dollar in a dozen years. LUV isn’t strangled by the union rules that wreaked havoc with American Airlines, Delta Air Lines, United Airlines, US Airways, etc. Management is employee- and customer-oriented.
While I’ll fly LUV, I would not own the stock because this smoothly run carrier flies at a price-earnings ratio of 53 times earnings. Yes, I know that LUV has a swell balance sheet, a good fleet of jets and is in position to take advantage of its weaker brethren, who are wallowing in a swill of debt, ghastly payroll costs and inflexible union demands.
LUV’s price-earnings ratio in its good years (1997-2001) averaged about 23, which in my book is still high.
I wouldn’t hesitate to buy SkyWest Inc. (SKYW-$13.64), which has a price-earnings ratio of 10. The regional airline’s 130 aircraft make more than 1,000 daily departures to 90 cities in 27 states. It flies to Canada, too. The company has principal hubs in Los Angeles, Salt Lake City, San Francisco, Portland, Ore., Dallas/Fort Worth and Seattle/Tacoma.
Revenues increased by 29 percent to $775 million and net income rose 55 percent to $78.3 million, or $1.36 a share, last year. Remember, last year is when every major airline watched revenues plummet and gave serious thought to declaring bankruptcy.
With 5,600 employees and its headquarters in St. George, Utah, SKYW expects to earn $1.50 per share in 2003, a 10 percent improvement from 2002. In 2004, it expects to have 6,000 employees and per-share profits of $1.81.
SKYW has a chunk of cash, owes less than $240 million and pays an 8-cent dividend, which might be raised later this year to a dime. The company knocks the socks off its high-priced competition by offering the same flights to major cities in the West, but with better service, friendlier personnel, dependable on-time arrivals and departures and much cheaper tickets.
Meanwhile, of the 11 suits who follow the company, nine rate SKYW a “buy,” one ranks it a “hold” and one says “sell.” Considering SKYW’s low price-earnings ratio, its great balance sheet, its impressive route system and real cool management, I’d hop on 300 shares.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or visit his Web site at www.berkoradio.com.