Southwest Airlines Co (LUV, Financial) experienced a daily gain of 4.18%, yet over the past three months, the stock has seen a slight decline of 0.92%. With an Earnings Per Share (EPS) of $0.75, investors might wonder if the stock is significantly undervalued. This article will delve into a valuation analysis of Southwest Airlines Co, providing insights into whether the current market price reflects the company's true intrinsic value. Read on for a detailed examination of the factors that contribute to our valuation conclusion.
Company Introduction
Southwest Airlines Co is a leading force in the aviation industry, recognized as the largest domestic air carrier in the United States by passenger volume. The company boasts a fleet of over 700 Boeing 737 aircraft and is known for its short-haul, leisure-focused flights, operating a point-to-point network. Despite its focus on leisure travel, Southwest Airlines Co has also made strides to accommodate business travelers with additional perks. Operating under a low-cost carrier business model, the company has established a strong presence in the market.
When comparing the current stock price of $29.16 to the GF Value of $61.36, it appears that Southwest Airlines Co's shares might be trading at a significant discount. This initial observation suggests that there could be a substantial margin of safety for potential investors, which we will explore further in this analysis.
Understanding the GF Value
The GF Value is a unique valuation metric that estimates the intrinsic value of a stock. It is derived from a combination of historical trading multiples, such as PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow, along with a GuruFocus adjustment factor that accounts for the company's past performance and growth. Additionally, future business performance estimates are factored into the calculation.
According to this measure, Southwest Airlines Co stock appears to be significantly undervalued. The GF Value suggests a fair trading value that a stock should command in the market. If a stock's price is well above this value, it may be overvalued, indicating potential for lower future returns. Conversely, a price significantly below the GF Value may signal higher future returns. With a market cap of $17.40 billion, Southwest Airlines Co's current price suggests that investors could expect a more substantial long-term return than the company's business growth might indicate.
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Financial Strength Assessment
Investors are often cautious about companies with weak financial strength, as it can lead to permanent capital loss. Therefore, examining indicators such as the cash-to-debt ratio and interest coverage is crucial. Southwest Airlines Co's cash-to-debt ratio of 1.27 ranks better than 72.19% of its peers in the Transportation industry, leading GuruFocus to assign a financial strength rating of 6 out of 10, indicative of a stable balance sheet.
Profitability and Growth Prospects
Investing in profitable companies is generally less risky, particularly those with a history of consistent profitability. Southwest Airlines Co has maintained profitability for 9 out of the past 10 years. With a revenue of $25.40 billion and an Earnings Per Share (EPS) of $0.75 over the past 12 months, the company's operating margin stands at 0.96%, which is lower than 80.85% of companies in the Transportation industry. This positions Southwest Airlines Co's profitability as fair in the sector.
Growth is a vital factor in valuing a company, often correlating with long-term stock performance. However, Southwest Airlines Co's 3-year average annual revenue growth rate is -3.8%, ranking below 71.15% of companies in the Transportation industry. Additionally, the 3-year average EBITDA growth rate is -22.3%, which is lower than 89.91% of the industry's companies.
ROIC vs. WACC Analysis
An effective way to gauge a company's profitability is by comparing its Return on Invested Capital (ROIC) to its Weighted Average Cost of Capital (WACC). ROIC indicates how well a company generates cash flow relative to the capital invested, while WACC represents the average rate a company pays to finance its assets. If ROIC exceeds WACC, the company is likely creating shareholder value. Over the past 12 months, Southwest Airlines Co's ROIC was 0.64, while its WACC was 8.05, suggesting challenges in generating value.
Conclusion
In summary, Southwest Airlines Co (LUV, Financial) stock presents strong indications of being significantly undervalued. The company's financial condition is fair, and its profitability is reasonable, although its growth ranks unfavorably compared to industry peers. To gain a deeper understanding of Southwest Airlines Co's financials, interested parties can visit the 30-Year Financials here.
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This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
