Usually, companies have to increase their sales to increase their revenues. However, companies that can add new features and services can increase their revenues. Even if they don’t have additional sales or customers either.
In an industry that’s built on such add-ons, companies that have offered low-cost frills have built a niche. But having additional add-ons can allow them to continue claiming a cost advantage, while also offering a higher-end experience.
That’s likely the move behind Southwest Airline’s (LUV) decision to abandon its open seating model and move to assigned seating.
The low-cost airliner beat earnings expectations as well, but the potential increased revenue from higher seat fares could mean far more growth for the company in the quarters ahead.
Southwest shares are down 15% over the past year, even with revenues up 11%. Shares are a bit pricey, trading at over 40 times earnings, but at about 27 times future earnings.
Action to take: Southwest shares have flatlined over the past month, but the earnings beat and new business plan could mean shares break higher over the months ahead.
At current prices, Southwest also pays a 2.7% dividend.
For traders, the December $30 calls, last trading for about $2.05, could see high double-digit returns or better in the months ahead.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any company mentioned in this article.