Here is a Reuters news report that just posted about an hour ago:
NEW YORK, Nov 21 (Reuters) - Fitch Ratings on Friday downgraded ratings of Southwest Airlines (LUV.N: Quote, Profile, Research, Stock Buzz) on concerns about the company's high leverage after it drew down $400 million from a revolving credit facility.
The agency cut Southwest's senior unsecured debt and issuer default rating by one notch to "BBB-plus," placing them three notches above speculative, or "junk" status.
The move "reflects Fitch's view that continuing uncertainty in the U.S. airline operating environment and near-term credit market concerns have led LUV to raise leverage to a level that is no longer consistent with an "A" category credit profile," the agency said in a statement.
Southwest's decision to draw down on its credit facility has raised balance sheet debt to about $3 billion from $2.1 billion at end 2007.
"It appears unlikely that any significant debt reduction will occur in 2009," said Fitch.
The cost of insuring Southwest debt against possible default rose sharply on Friday. Five-year credit default swaps were last trading at about 396 basis points, or $396,000 annually to insure $10 million of debt for five years, according to Markit Intraday, up about 24 percent from late Thursday. (Reporting by Ciara Linnane; Editing by Leslie Adler)
I have no real point in posting this article, except to point out a recent downgrade.
My thoughts on the subject of whether or not to buy LUV. The majority of LUV's stock is owned by institutional investors. So when individual investors pull their money out of the market, the fund/institutional managers have no choice but to sell. Hence, the dramatic decrease in "value" recently. It has been over ten years since LUV traded at these prices.
In my opinion, LUV's current valuation is based on these much larger market forces than on any particular change or specific flaw in their business model or execution of their short and long term business strategy. Fewer people may be flying the friendly skies in a recessionary economy, but when they do, they still will want the lowest price ticket they can find, very generally speaking. Oil is now trading right around $50. We could list hundreds of pro and con factors that effect their business model. At the end of the day, however, SWA is still SWA. If you LUV them, great! If you don't, that is fine as well.
Long term, at its current price ($8) LUV is a good buy, at $6 to $7 it is a great buy. It just depends though how tough your stomach is in the event the entire market continues to go down. Once individual investor money comes back into the market (whether that be in 5 hours, 5 days, 5 months or 5 years from now) my guess is that LUV will be right back between $14 and $16 a share. In fact LUV may be higher than that due to their historical ability to capitalize on competitor vulnerabilities when competing in tough market conditions.
Just my 2 cents.