Motley Fool Hidden Gems Investing - We Can Fix You, Southwest

Episode Date: June 10, 2024

Elliott Management amps up the activist activity, and puts Southwest’s leadership and board on notice.  (00:21) Asit Sharma and Dylan Lewis discuss: - Why Elliot Management is looking to shakeup leadership at Southwest after taking a 10%+ stake in the airline. - Nvidia’s stock split, and why this one may matter more than most. - The new names in the S&P 500 – Crowdstrike, KKR, and GoDaddy – and what they say about the state of the market.  (17:57) Are the world’s tallest buildings ego-projects or promising investment opportunities? Ricky Mulvey talks with economist and skyscraper expert Jason Barr, about the state of “supertalls” and how China’s building boom is leading to an increase in homeowners without homes. Companies discussed: LUV, NVDA, CRWD, KKR, GDDY, RHI, CMA, ILMN Host: Dylan Lewis Guests: Asit Sharma, Ricky Mulvey, Jason Barr Producer: Ricky Mulvey Engineers: Dan Boyd Visit our sponsor Monarch Money: Go to monarchmoney.com/FOOL for an extended 30 day free trial. Learn more about your ad choices. Visit megaphone.fm/adchoices

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Whatever lies ahead, don't change your morning. Let your morning change you. Discover Coffee Plus on Nespresso.com. Dylan Lewis. One major index gets a shakeup, and another one might have one soon. Motley Fool Money starts now. I'm Dylan Lewis, and I'm joined over the airwaves by Motley Fool analyst Asit Sharma. Asit, thanks for joining me. Dylan, thank you for having me.

Today, we've got an activist investor that just can't get enough action, a breakdown on what's in and out of the major indices, and a look at whether the tallest buildings in the world should be interesting to investors. Asit, we're going to kick off with some boardroom drama, though. Activist investor Elliott Management has a new target. The company has built up a $2 billion position in Southwest Airlines. In keeping with tradition, Asit, they have some ideas for how to shake things up. Yeah. Interesting, Dylan, the dollars are big, but the percentage is big, too. Elliott Funds saying today they have an approximately 11% economic interest in Southwest Airlines.

This is no 1%, 2% activist coming in and wanting to shake things up. This is serious, and that's, I think, why the stock is up today. What Elliott said is, look, Southwest is an amazing airline, it's been well-run for decades, it's always returned well for shareholders, lots of profits. But in the last few years, a lot of what we're seeing in its performance is due to legacy thinking and current management. The CEO and the chairman between them having decades of experience, they're not up to the task. This airline has to monetize its non-ticket revenue in a better fashion. It's got to work on its operational deficiencies. They're really gunning for some change. They predict that the company is worth maybe 77% more than current share

price if it has a meaningful turnaround. You can understand the positive market reaction here. As you mentioned, the company has not been a very strong performer under current CEO Bob Jordan. He took over the role in February of 2022, shares down around 35% in the time that he has been at the helm. There have been some industry headwinds, for sure. But Southwest also took some curious actions during that time. They were the first major airline to reinstitute a dividend post-COVID. They have had, I think, Asit, some of their own self-inflicted issues that have made it a little bit harder for them to climb out of the depths of pandemic travel. Right, Dylan. Those self-inflicted issues

are maybe the heart of this matter. Everyone remembers during the pandemic when Southwest had a software glitch and thousands of people were stranded because their systems weren't up to the task. What Elliott is saying in this letter, without saying it explicitly, is that the bottom line of an airline's equation costs per available seat miles are suffering because Southwest has under-invested in technology. This goes back to choices that were made a a long time ago. Southwest doesn't have a hub-and-spoke network like the big legacy airlines. It's cheaper because they have all these what are called peer-to-peer flights, direct flights with no real centers where they centralize maintenance and repair. That's

a really good business model if the tech can keep up. If you understand where to put resources and when, where to have boots on the ground, where to have planes waiting to be serviced, to service them. Without modernizing this technology, it costs you more for every seat mile that you sell to service your whole network. Part of this is going to be hard for Southwest to turn around in a short amount of time. It takes time to rebuild a system and make it very robust. But the other part of this too, is that management has sounded casual about this. They've never really owned up to, our systems are disastrously bad, we need to fix them quick, and we're doing everything we can. There's impatience in the investor community.

I think Elliott is capitalizing on that. Some of our listeners might be saying, wait a minute, weren't you guys just talking about Elliott Management taking a stake in a business? Yes, we were. You don't have to go too far back. They had a $2.5 billion position disclosed in Texas Instruments in late May, got right to it, sent a letter to the company's board.