With a daily change showing a loss of -1.89% and a 3-month decline of -12.02%, investors might wonder if the current market price reflects the true value of Southwest Airlines Co (LUV, Financial). The Earnings Per Share (EPS) stands at 0.63, prompting the question: is the stock significantly undervalued? Our valuation analysis aims to provide clarity on this matter and encourages readers to delve into the following comprehensive exploration of Southwest Airlines Co (LUV)'s intrinsic value.
Company Overview
Southwest Airlines Co is a major player in the aviation industry, recognized as the largest domestic air carrier in the United States by passenger volume. With a focus on short-haul, leisure flights, Southwest Airlines operates an all-Boeing 737 fleet, comprising over 700 aircraft. Although the airline is known for its low-cost carrier model, it has also started to cater to business travelers by offering longer routes and additional perks. A comparison between the current stock price of $26.52 and the GF Value of $44.63 suggests a significant undervaluation, setting the stage for an in-depth valuation analysis.
Understanding the GF Value
The GF Value is a unique measure of a stock's intrinsic value, incorporating historical trading multiples, a GuruFocus adjustment factor, and future business performance projections. It provides a benchmark for the stock's fair trading value. When a stock's price significantly deviates from the GF Value, it indicates potential overvaluation or undervaluation, influencing future returns. Currently, Southwest Airlines Co (LUV, Financial) appears significantly undervalued with a market cap of $15.90 billion, which could signal promising long-term returns for investors beyond the company's business growth.
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Financial Strength Analysis
Investing in companies with strong financial strength reduces the risk of capital loss. Southwest Airlines Co boasts a cash-to-debt ratio of 1.15, outperforming 70.47% of its peers in the Transportation industry. With an overall financial strength rating of 6 out of 10, the company's financial health is deemed fair.
Profitability and Growth Prospects
Profitable companies tend to offer less risk, particularly those with a history of consistent profitability. Southwest Airlines Co has recorded profits in 9 out of the past 10 years, with recent revenues reaching $26.70 billion. Despite an operating margin that falls behind 82.46% of the Transportation industry, the company's profitability is considered fair. Growth, a critical valuation component, shows Southwest Airlines Co outperforming 89.01% of the industry in 3-year average revenue growth, although its EBITDA growth rate ranks lower than its competitors.
ROIC vs WACC
Comparing a company's Return on Invested Capital (ROIC) with its Weighted Average Cost of Capital (WACC) reveals its value-creating efficiency. Southwest Airlines Co's ROIC of 0.27 suggests it is generating cash flow effectively relative to its invested capital. However, this must be assessed against its WACC of 8.33 to determine true value creation.
Final Thoughts on Southwest Airlines Co (LUV, Financial)'s Valuation
Southwest Airlines Co (LUV) presents a case of significant undervaluation. The company's financial condition and profitability are rated as fair, despite its growth ranking lower than industry peers. For a detailed look at Southwest Airlines Co's financial history, interested investors can view its 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.
