Southwest Is Flying High; Sony Isn’t Exactly Ahead of the Game

Southwest Airlines (LUV)

Jim: Buy

Mike: Buy

*

Mike: Here’s an airline that’s unique in many ways, Jim, but mostly because it makes money, and tons of it.

Jim: True, and that’s one reason Southwest Airlines is the exception to the rule that one generally should shy away from airline stocks.

Mike: What’s behind that rule?

Jim: There are so many factors that are beyond the control of airline executives, it’s hard for them to manage consistent growth. I’m talking, for example, about interest rates--a big deal for airlines because they borrow up to their eyeballs to buy jetliners. The price of jet fuel is another such factor. Then there are the unions that negotiate most airline workers’ contracts.

Mike: But Southwest has handled all of those issues with aplomb, as its stock shows.

Jim: No question. It’s hard to avoid using superlatives with this company, but its record speaks for itself. Since it was started about 29 years ago, it has turned a profit every year. No other carrier can say that. And it’s a credit to Southwest’s legendary founder and chairman, Herb Kelleher.

Mike: Right, Kelleher is a guy who runs on a very unusual combination of fuels himself, namely Wild Turkey bourbon and Philip Morris cigarettes.

Jim: Kelleher just might be the most colorful executive in corporate America. And it’s not just his personal habits, it’s also the amazing esprit de corps and humor he has instilled at Southwest, whose employees adore him even though they’re mostly unionized.

Mike: Southwest is a steady moneymaker in no small part because it runs a bare-bones operation. Look at the experience of flying Southwest: As you and I both know because we’ve spent more hours flying than we care to remember, it certainly doesn’t have the best food or the most luxurious cabins.

Jim: It doesn’t even have assigned seating.

Mike: No, but what it does have is predictability. You know that when you fly Southwest, you have to bring your lunch and you might get the center seat, but you’ll probably also get to your destination on time.

Jim: Southwest excels for several reasons. It operates only one kind of plane, the Boeing 737, so it saves gobs of cash not having to train its people to fly different types of jetliners. It also has tremendous employee morale, as I said; in fact it’s almost a cult at Southwest. I mean, check out its stock symbol: LUV.

Mike: The funniest comedy club I ever attended was a late-night Southwest flight out of San Jose, when the flight attendants gave their “fasten-your-seat-belt” spiel. I would have been rolling in the aisle except, of course, I had my seat belt on.

Jim: That’s one of their trademarks, that the attendants can have fun with those stilted flight rules they have to announce.

Mike: In fact, one of the prerequisites of getting a job at Southwest is having a sense of humor. Whereas having a sense of humor is a prerequisite for being a passenger on some other airlines. Why, I remember one flight on Northwest . . .

Jim: Leave it for your memoirs, Mike. Southwest also benefits from staying away from the most congested airports, so its planes can more easily leave and arrive on time. Also, it flies mostly short-haul routes, so it can offer frequent service. That, combined with the short turnaround time its planes spend at airport gates, keeps Southwest’s jets in the air most of the time, giving the airline top utilization of its assets. The benefits end up on its bottom line.

Mike: So the performance of Southwest’s stock is comparable to that of other airline stocks this year, right?

Jim: Very funny. Southwest has surged 80% so far this year, while the American Stock Exchange’s index of airline stocks is down 4%. Despite Southwest’s run-up, I’d still highly recommend this stock, which trades at about 22 times estimated 2001 earnings per share.

Mike: You still think it has a ways to go?

Jim: Look at it this way: The hike in jet fuel prices this year has dented the profits, and stock prices, of most major airlines. But you’d never know jet fuel prices had risen by looking at Southwest’s earnings or its stock.

Mike: We should note, however, that there is one big cloud on Southwest’s horizon. The problem, not to be crass about it, is what happens if Kelleher falls out of an airplane?

Jim: Right, Kelleher is now 69 and he is being treated for prostate cancer, though all signs are that he’s still quite healthy. But it troubles many that he hasn’t yet named a successor. And no matter who it is, can they keep Southwest on its profitable track?

But does that make you want to avoid the stock?

Mike: No. It might make for some bumpy skies ahead, but this company is fundamentally strong. This is an airline that all but turns away passengers, because there’s such demand for its service.

But I do recommend bringing a box lunch.

Sony (SNE)

Jim: Don’t buy

Mike: Don’t buy

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Mike: Jim, we move now to electronics and entertainment giant Sony Corp. Its big story these days is a machine called the PlayStation2. I just want to say that judging from all the press, this game player seems to have an unusual capability.

Jim: I’ll bite. What?

Mike: It seems to have the ability to cloud men’s minds.

Jim: Go ahead.

Mike: The hype on this machine has been nothing short of outrageous. Let me read you one quote here, this from the CEO of a game-development firm who said, “PlayStation2 will do for entertainment what Gutenberg did for printing.”

Now, in words of one syllable: I don’t think so.

Jim: Your point being that PlayStation2, by all accounts in the media, is the be-all and end-all machine that will carry Sony into the future. You say it’s not going to happen. Suppose you explain why many people think it will happen.

Mike: Certainly, Lord Zargon. PlayStation2 is the successor to the original Sony PlayStation, which indeed is the most popular game player on the market.

What PlayStation2 brings to the table--other than the apparent ability to make pundits gibber--is a superior graphics capability. It also comes equipped with a theoretical--and I say theoretical because not all the hardware is yet available--Internet connection, a DVD player and other doodads.

Jim: Sounds OK on paper.

Mike: And Sony is trying to position this as the communications module for the new millennium. But there are several problems with this argument.

Let’s start with the most obvious: the production glitch. Sony couldn’t line up enough components from its suppliers to roll out this machine at full scale in time for Christmas. While it at one point hoped to have 1 million players on the shelves, it could only muster up half that many.

Jim: And they’ve already been sold.

Mike: Right. They’ve been sold to all those people who line up at store entrances at midnight the night before the official launch--

Jim: --because they’re really intense game players and they have no life.

Mike: So the real launch for PlayStation2 is pushed off toward sometime next year, around March. And guess what it’s going to run into then? It’s going to run into the next-generation console from Nintendo and a whole new offering from Microsoft, the so-called X-box. You think you’ve heard hype lately? Just you wait.

Jim: What Sony has done, in effect, is make this huge bet that the PlayStation, with its Net connections and so forth, will be the central piece of the home-entertainment setup.

Mike: Sure, but we’ve been hearing this sort of stuff for five years already. Everyone’s been saying that everything is going to converge into one box and it’s going to be on the TV and not the personal computer. All right. Maybe yes, maybe no.

Jim: I’ve already made it clear I have huge doubts about all that happening.

Mike: But the PlayStation2 is going to sell for $300. Yet you can buy yourself a DVD player for about a hundred bucks these days and it’s perfectly adequate. So what do you want with a $300 DVD player?

Jim: The question is whether you would want a PlayStation2 over any other game player because you get the Internet connection that Sony is promising.

Clearly, what Sony wants to do is leverage its entertainment content--its huge movie and TV show empire at Columbia Pictures, for example--and shove all of that content through the PlayStation2, or should I say download from the Internet into the PlayStation and TV.

Mike: This all sounds very good in the abstract. But can you name one great Sony entertainment-content brand name?

Jim: No.

Mike: Can you name a Walt Disney brand name?

Jim: Sure. “101 Dalmatians.”

Mike: That’s the first of about 101 Disney brands you can name, no doubt. The point is that most consumers don’t know where their entertainment shows or movies come from--unless it’s from Disney.

If content is king, people will get their content where they want it. Sony is not going to control or dominate the content distribution stream just because it has all of these inputs and outputs on one machine.

Jim: Simply put, to most people Sony still means hardware, those electronic products it puts out extremely well. What has made Sony what it is today is not its movie studio but its Walkman.

Mike: Right, if you look at its earnings record, those little boxes are what bring in most of the revenue and profit for Sony, which now has $60 billion in annual sales.

Jim: I think the uncertainty about its PlayStation/Internet future is obviously reflected in the U.S. version of its Japanese stock. Those shares were at nearly $160 early this year; now they’re in the low-$80s.

Mike: Does that make it a buy for you?

Jim: No. To me, Sony’s whole premise is fairly muddled. I don’t doubt that Sony will continue to sell as many of its electronics boxes as it always has, but I don’t think the stock market will put a premium valuation on that.

Mike: I figure that Sony’s entertainment-content business, including movies, TV and music, actually is a drag on its market valuation. Many investors shy away from those businesses. And for good reason: Nobody knows where the music business is going, for example, given the rapid advance of digital piracy.

As for movies, does anybody really make money over the long-term in the movie business?

My conclusion is that this is a very risky stock, even at these lower prices.

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Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Hiltzik (michael.hiltzik@latimes.com) covers technology and entertainment. Either can also be reached at Business Section, 202 W. 1st St., Los Angeles, CA 90012.

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Southwest Airlines

Monday: $29.63

Sony

Monday: $79.06

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