Southwest Airlines Co (LUV, Financial) recently reported a daily gain of 2.59%, despite a 3-month loss of -11.7%. The company's Earnings Per Share (EPS) stands at 0.88. These figures prompt the question: Is the stock significantly undervalued? This article provides a comprehensive valuation analysis of Southwest Airlines Co, aiming to answer this question. Read on to gain valuable insights.
Introduction to Southwest Airlines Co
Southwest Airlines Co is the largest domestic air carrier in the United States, boasting over 700 aircraft in an all-Boeing 737 fleet. The company primarily specializes in short-haul, leisure flights, operating a low-cost carrier business model. Despite its focus on shorter routes, the airline also offers some longer routes and a few perks for business travelers. The current stock price stands at $29.69, while the GF Value, an estimate of fair value, is $62.13. This discrepancy suggests that the stock may be significantly undervalued, warranting a deeper exploration of the company's value.
The GF Value of Southwest Airlines Co
The GF Value is a proprietary measure, providing an estimation of a stock's intrinsic value. It is calculated considering historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line represents the fair value that the stock should ideally be traded at.
Southwest Airlines Co's stock appears to be significantly undervalued based on the GF Value. The current price of $29.69 per share and a market cap of $17.70 billion suggest that the stock is trading below its intrinsic value. Therefore, the long-term return of its stock is likely to be much higher than its business growth.
Financial Strength of Southwest Airlines Co
Investing in companies with poor financial strength can result in a higher risk of permanent capital loss. Hence, it is crucial to review the financial strength of a company before investing. A good starting point is to look at the cash-to-debt ratio and interest coverage. Southwest Airlines Co has a cash-to-debt ratio of 1.31, which is better than 72.42% of 939 companies in the Transportation industry. The company's overall financial strength is ranked at 6 out of 10 by GuruFocus, indicating fair financial health.
Profitability and Growth of Southwest Airlines Co
Investing in profitable companies is generally less risky, especially those demonstrating consistent profitability over the long term. Southwest Airlines Co has been profitable for 9 out of the past 10 years, with revenues of $25.10 billion and Earnings Per Share (EPS) of $0.88 in the past 12 months. However, its operating margin of 2.07% is worse than 76.41% of 937 companies in the Transportation industry, suggesting fair profitability .
Growth is a critical factor in a company's valuation. Southwest Airlines Co's 3-year average revenue growth rate is worse than 71.02% of 911 companies in the Transportation industry. Its 3-year average EBITDA growth rate is -22.3%, which ranks worse than 89.76% of 820 companies in the industry, indicating poor growth .
ROIC vs WACC
Comparing a company's Return on Invested Capital (ROIC) to its Weighted Average Cost of Capital (WACC) is another way to evaluate its profitability. If the ROIC exceeds the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Southwest Airlines Co's ROIC was 1.4, while its WACC came in at 7.46.
Conclusion
In conclusion, Southwest Airlines Co (LUV, Financial) appears to be significantly undervalued. The company's financial condition and profitability are fair, but its growth ranks worse than 89.76% of 820 companies in the Transportation industry. For more details about Southwest Airlines Co's stock, check out its 30-Year Financials here.
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