Southwest Airlines Co (LUV, Financial) observed a daily gain of 1.38%, despite a 3-month loss of 27.2%. The company's Earnings Per Share (EPS) (EPS) stands at 0.88. With these figures in mind, we aim to answer a critical question: is Southwest Airlines Co (LUV) significantly undervalued? To unravel this, we invite you to delve into our comprehensive valuation analysis.
Company Snapshot
Southwest Airlines Co, the largest domestic air carrier in the United States, operates an all-Boeing 737 fleet of over 700 aircraft. The airline, predominantly specializing in short-haul, leisure flights, uses a point-to-point network and follows a low-cost carrier business model. Despite its current stock price of $27.18, our GF Value estimates the fair value at $61.85, indicating a significant undervaluation. This discrepancy sets the stage for a deeper exploration of the company's intrinsic value.
Understanding GF Value
The GF Value is a unique measure of a stock's intrinsic value, calculated based on historical multiples, a GuruFocus adjustment factor, and future business performance estimates. The GF Value Line represents the fair value at which the stock should ideally be traded. If the stock price significantly deviates above the GF Value Line, it is overvalued, and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
Southwest Airlines Co (LUV, Financial) appears to be significantly undervalued according to our GF Value calculation. With its current price of $27.18 per share and a market cap of $16.20 billion, the stock's long-term return is likely to be much higher than its business growth due to its significant undervaluation.
Financial Strength
Assessing the financial strength of a company is crucial before investing in its stock. Companies with poor financial strength pose a higher risk of permanent loss. A great way to understand a company's financial strength is by examining its cash-to-debt ratio and interest coverage. With a cash-to-debt ratio of 1.31, Southwest Airlines Co ranks better than 72.38% of 934 companies in the Transportation industry. The overall financial strength of Southwest Airlines Co is 6 out of 10, indicating fair financial health.
Profitability and Growth
Investing in profitable companies, especially those demonstrating consistent long-term profitability, poses less risk. Companies with high profit margins are typically safer investments than those with low profit margins. Southwest Airlines Co has been profitable 9 out of the past 10 years. With a revenue of $25.10 billion over the past twelve months and an EPS of $0.88, its operating margin is 2.07%, ranking worse than 76.93% of 945 companies in the Transportation industry. However, its overall profitability is fair, with a rank of 7 out of 10.
One of the most critical factors in a company's valuation is its growth. Companies that grow faster create more value for shareholders, especially if that growth is profitable. Southwest Airlines Co's average annual revenue growth is -3.8%, ranking worse than 70.96% of 909 companies in the Transportation industry. Its 3-year average EBITDA growth is -22.3%, which ranks worse than 89.84% of 817 companies in the Transportation industry.
Another way to evaluate a company's profitability is by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC exceeds the WACC, the company is likely creating value for its shareholders. In the past 12 months, Southwest Airlines Co's ROIC was 1.4 while its WACC was 7.6.
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 89.84% of 817 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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