Late Thursday, Moody's Investors Service announced that it might downgrade its credit ratings for Southwest Airlines Co. (NYSE: LUV). In a statement, the ratings agency said the airline's Baa1 senior unsecured rating is at risk, due to the likelihood of weak demand trends persisting into 2010.
The downgrade warning comes shortly after LUV slashed airfares dramatically to remain competitive, with some one-way flights running as low as $30 during a recent promotion. "Even with the benefits of Southwest's advantageous cost structure, the current yield environment is likely to challenge Southwest to restore credit metrics to levels supportive of the current rating," said Moody's in a statement.
In addition to the fundamental concerns cited by Moody's, LUV is also facing some challenges on the charts. The stock has shed 52.8% during the past 52 weeks, and long-term resistance from its 10-month moving average looms directly overhead. This trendline hasn't been toppled on a monthly closing basis since September 2008.
Short sellers are betting on additional downside for the equity. The number of LUV shares sold short has risen significantly during the past month, surging by 11.4% during just the most recent reporting period. Now, these bearish bets account for 3.6% of the security's available float.
Meanwhile, in the options world, call volume has ramped up in recent weeks. During the past 10 days, traders on the International Securities Exchange (ISE) have bought to open nearly 10 times more calls than puts on LUV.
Taking these two data points in context, it's possible that some short sellers might be hedging their pessimistic positions with calls ahead of the airline's upcoming earnings report. LUV is set to unveil its quarterly results on Tuesday, July 21, and analysts are expecting a profit of 7 cents per share. The firm has a solid history in the earnings spotlight, having exceeded consensus estimates in three out of the last four reporting periods.
Elizabeth Harrow is an analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the video series Schaeffer's Daily Q&A on SchaeffersResearch.com.
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Reader Comments (Page 1 of 1)
8-13-2009 @ 8:19AM
cabo79 said...
I use Southwest on a regular basis. They have NOT cut there fares, it was a marketing gimick to get more people to fly. My retirement income has been cut in half but I still fly to go skiing and visit my kids.