The aviation industry has been a rollercoaster ride for investors, with Southwest Airlines Co (LUV, Financial) being no exception. The stock recently suffered a daily loss of -1.57%, and a 3-month loss of -17.71%. However, with an Earnings Per Share (EPS) of 0.88, the question arises: is the stock significantly undervalued? In this article, we delve into the valuation analysis of Southwest Airlines Co, providing an in-depth assessment of its financial health and future prospects.
Company Overview
Southwest Airlines Co, the largest domestic air carrier in the United States, operates over 700 aircraft in an all-Boeing 737 fleet. Specializing in short-haul, leisure flights with a point-to-point network, the airline has carved out a niche for itself in the competitive aviation sector. Despite its current stock price of $27.61, the GF Value estimates its fair value at $62.27, suggesting that the stock might be significantly undervalued.
Understanding the GF Value
The GF Value is a proprietary valuation model that estimates a stock's intrinsic value. It is based on historical trading multiples, an adjustment factor from GuruFocus based on past returns and growth, and future business performance estimates. The GF Value Line provides a visual representation of a stock's fair trading value. If a stock's price is significantly above the GF Value Line, it is likely overvalued and may yield poor future returns. Conversely, if it is significantly below the GF Value Line, it could be undervalued and yield higher future returns.
According to the GF Value, Southwest Airlines Co appears to be significantly undervalued. With a market cap of $16.40 billion, the stock's current price is significantly below the GF Value Line. This suggests that the long-term return of Southwest Airlines Co's stock is likely to be much higher than its business growth.
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Evaluating Financial Strength
Investing in companies with low financial strength could result in permanent capital loss. As such, it's crucial to evaluate a company's financial health before investing. Southwest Airlines Co has a cash-to-debt ratio of 1.31, ranking better than 72.45% of 940 companies in the Transportation industry. Based on these metrics, GuruFocus ranks Southwest Airlines Co's financial strength as 6 out of 10, suggesting a fair balance sheet.
Profitability and Growth
Investing in profitable companies carries less risk, especially those that demonstrate consistent profitability over the long term. Southwest Airlines Co has been profitable 9 years over the past 10 years. However, its operating margin of 2.07% is worse than 76.47% of 952 companies in the Transportation industry. Overall, GuruFocus ranks Southwest Airlines Co's profitability as fair.
Growth is a critical factor in a company's valuation. The faster a company grows, the more likely it is to create value for shareholders, especially if the growth is profitable. However, the 3-year average annual revenue growth rate of Southwest Airlines Co is -3.8%, which ranks worse than 70.77% of 917 companies in the Transportation industry. The 3-year average EBITDA growth rate is -22.3%, ranking worse than 89.78% of 822 companies in the Transportation industry. This suggests that Southwest Airlines Co's growth is relatively weak.
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 profitability. ROIC measures how well a company generates cash flow relative to the capital it has invested in its business, while WACC is the rate that a company is expected to pay on average to finance its assets. If the ROIC is higher than 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 7.5.
Conclusion
In conclusion, Southwest Airlines Co (LUV, Financial) appears to be significantly undervalued. The company's financial condition is fair, and its profitability is fair. However, its growth ranks worse than 89.78% of 822 companies in the Transportation industry. To learn more about Southwest Airlines Co stock, you can check out its 30-Year Financials here.
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