Southwest Airlines Co (LUV, Financial) has recently shown a daily gain of 3.31% and a 3-month gain of 3.65%, with an Earnings Per Share (EPS) of $0.75. These figures spark an intriguing question: Is the stock significantly undervalued? The following analysis aims to delve into the valuation of Southwest Airlines Co and provide investors with a comprehensive understanding of its market position.
Company Introduction
Southwest Airlines Co is a dominant player in the US aviation industry, known for its extensive domestic flight network and efficient point-to-point service model. With a fleet of over 700 Boeing 737 aircraft, the company has carved out a niche in short-haul, leisure travel. Despite the stock's current price of $30.31, the GF Value estimates its fair value at $61.11, suggesting that the stock may be significantly undervalued. This discrepancy sets the stage for a deeper exploration into the intrinsic value of Southwest Airlines Co.
Summarize GF Value
The GF Value is a unique valuation method that combines historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. It serves as a benchmark for the stock's fair trading value. Currently, Southwest Airlines Co's market cap stands at $18.10 billion, and with a price significantly below the GF Value Line, it appears to be substantially undervalued. This positioning implies that Southwest Airlines Co's stock may offer a higher long-term return than its business growth alone would suggest.
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Financial Strength
Before investing, assessing a company's financial strength is crucial to avoid the risk of permanent loss. Southwest Airlines Co boasts a cash-to-debt ratio of 1.27, outperforming 72.31% of its peers in the Transportation industry. This indicates that the company is in a solid financial position, with a financial strength rating of 6 out of 10.
Profitability and Growth
Southwest Airlines Co has maintained profitability for 9 out of the past 10 years, signaling less investment risk. However, its operating margin of 0.96% is below the industry average. Despite this, the company's consistent profitability over an extended period underpins its fair profitability rank. On the growth front, Southwest Airlines Co's 3-year average annual revenue growth rate of -3.8% and EBITDA growth rate of -22.3% rank below many of its industry counterparts, highlighting an area for potential improvement.
ROIC vs WACC
An effective way to measure a company's profitability is by comparing its Return on Invested Capital (ROIC) to its Weighted Average Cost of Capital (WACC). Southwest Airlines Co's ROIC of 0.64 is substantially lower than its WACC of 8.24, suggesting that the company may not be creating value for shareholders as efficiently as possible.
Conclusion
In conclusion, Southwest Airlines Co (LUV, Financial) appears to be significantly undervalued based on the GF Value. Although the company's financial condition and profitability are deemed fair, its growth and value creation potential, as indicated by the ROIC and WACC comparison, could be areas of concern. To gain a deeper insight into Southwest Airlines Co's financials, interested investors can explore 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.
