Southwest Airlines Co (LUV, Financial) recently experienced a day's loss of 1.19%, yet it has achieved a 3-month gain of 10.37%. With an Earnings Per Share (EPS) of $0.75, investors might wonder if the stock is significantly undervalued. The following analysis aims to shed light on this question by examining the company's fair value as determined by the proprietary GF Value metric.
Company Introduction
Southwest Airlines Co, the largest domestic air carrier in the United States by passengers boarded, operates an all-Boeing 737 fleet with over 700 aircraft. While the airline primarily focuses on short-haul, leisure flights with a point-to-point network, it also offers longer routes and perks for business travelers. With a business model centered on low-cost operations, Southwest Airlines Co has become a staple in the aviation industry. When juxtaposed with the current stock price of $29.15, the GF Value of $61.91 suggests a significant undervaluation, prompting a closer examination of the company's financial health and prospects.
Summarize GF Value
The GF Value is a unique valuation tool that calculates the intrinsic value of a stock. It incorporates historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line is a visual representation of this fair value, suggesting where the stock should be trading. If the stock price is significantly below the GF Value Line, as it is with Southwest Airlines Co at $29.15 per share, the stock is likely undervalued, potentially offering higher future returns.
Because Southwest Airlines Co is significantly undervalued, the long-term return of its stock is likely to outpace its business growth, indicating a potentially attractive investment opportunity.
Financial Strength
Assessing a company's financial strength is crucial before investing. Companies with robust financials have a lower risk of permanent loss. Southwest Airlines Co's cash-to-debt ratio stands at 1.27, surpassing 72.23% of its peers in the Transportation industry. This indicates that the company has a fair financial strength rating of 6 out of 10.
Profitability and Growth
A company's profitability is often a reliable indicator of its investment potential. 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 twelve months. However, its operating margin of 0.96% ranks lower than 80.63% of competitors in the Transportation industry, leading to a profitability rank of 7 out of 10, which is considered fair.
The growth of a company is integral to its valuation. While Southwest Airlines Co's 3-year average annual revenue growth rate of -3.8% is below average within the industry, its EBITDA growth rate of -22.3% ranks even lower, indicating challenges in the company's growth trajectory.
ROIC vs WACC
Comparing a company's Return on Invested Capital (ROIC) with its Weighted Average Cost of Capital (WACC) provides insight into its value creation. Southwest Airlines Co's ROIC of 0.64 and WACC of 8.01 suggest that it is not currently generating adequate returns on capital relative to its costs. This is a concern for value creation and future profitability.
Conclusion
In summary, the evidence points to Southwest Airlines Co (LUV, Financial) being significantly undervalued. The company's fair financial condition and profitability are tempered by its less impressive growth rates and value creation metrics. For a more detailed financial overview, interested investors can review Southwest Airlines Co's 30-Year Financials here.
Discover High-Quality Investments
To uncover high-quality companies that may deliver above-average returns, explore the GuruFocus High Quality Low Capex Screener.
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.
