Wednesday, March 12, 2008

Berkshire slips, little other movement and watching Southwest drop a few thousand feet...

SymbolPriceChange ($)

Not much movement on anything but Berkshire today, which slid 43 points. Google was up to +5% earlier in the day but came back down to finish up just 35 cents. (Of course, Berkshire and Apple actually moved about the same amount, percentage-wise: -1%.)

Another stock on my watch list had a tumultuous day to be sure: Southwest Airlines (LUV) dropped 7.34%, or 0.91 to 11.49 on news that they were grounding as many as 43 planes for "safety reasons". This represents a bit of an issue for them, as the FCC revealed just last week some inconsistencies with their safety practices that they had up until now staunchly denied. In addition to grounding the planes, they fired or put on leave 3 individuals within the company partially responsible for maintenance and safety practices.

Southwest is one of the nation's safest carriers. They've never had an in-flight crash or fatality (though they've slid off the runway twice, with on-ground fatalities in at least one of those occasions; both were pilot error in inclement weather if memory serves) which is saying something, considering they carry the most domestic passengers.

That said, no one wants to hear that your favorite airline is cutting what everyone agrees are pretty damn critical corners. Cracks in the fuselage can't be ignored; stress fractures can cause planes to rupture and has in the past, though for different airlines. Ironically, on my last trip to Vegas, our plane was pulled for safety reasons just as we were about to board. Something about it being "not airworthy." I'd much rather they make that call *before* I get on the plane, than learn the hard way.

I'm anticipating we'll see a bit more of a slide for Southwest as the full details of the issue at hand emerge. Grounding 43 planes is a ridiculously expensive exercise as well and may have an impact on earnings for the quarter, no matter the length of the grounding.

Southwest has been one of the best performing stocks consistently for the last 30 years, right up there with Wal-Mart. They're on my watch list because they're typically very smart about how they run their business. Even when all the other airlines were busy declaring bankruptcy, Southwest was making a profit consistently. (In fact, they've reported profits for every quarter in the past 30 years, missing once I believe in 2002.) They leverage their purchasing power to buy fuel futures to help absorb rising fuel costs—a move they've played far better than their rivals, and it's shown. The hedging and cost structure changes aren't quite as powerful lately and haven't translated to good times for their share value, but it'll still help them long term.

I'll be looking to pick up some Southwest once the dust settles from this and barring any of their planes dropping from the sky. If anything, I anticipate will help undervalue the stock enough to make it worthwhile to get in cheap. It's been lackluster for the past two years and might be primed for an uptick if they can avoid getting wrung out too harshly from the groundings.

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