Southwest Airlines Company shares fell by -3.3% during the day's evening session, and are now trading at a price of $32.26. Is it time to buy the dip? To better answer that question, it's essential to check if the market is valuing the company's shares fairly in terms of its earnings and equity levels.
A Lower P/B Ratio Than Its Sector Average but Trades Above Its Graham Number:
Southwest Airlines Co. operates as a passenger airline company that provide scheduled air transportation services in the United States and near-international markets. The company belongs to the Consumer Discretionary sector, which has an average price to earnings (P/E) ratio of 22.33 and an average price to book (P/B) ratio of 3.12. In contrast, Southwest Airlines Company has a trailing 12 month P/E ratio of 29.6 and a P/B ratio of 1.78.
When we divideSouthwest Airlines Company's P/E ratio by its expected five-year EPS growth rate, we obtain a PEG ratio of 0.35, which indicates that the market is undervaluing the company's projected growth (a PEG ratio of 1 indicates a fairly valued company). Your analysis of the stock shouldn't end here. Rather, a good PEG ratio should alert you that it may be worthwhile to take a closer look at the stock.
Low Leverage Levels but a Declining EPS Growth Trend:
| 2020-02-04 | 2021-02-08 | 2022-02-07 | 2023-02-07 | |
|---|---|---|---|---|
| Revenue (MM) | $22,428 | $9,048 | $15,790 | $23,814 |
| Gross Margins | 32.1% | -7.0% | 34.1% | 25.6% |
| Operating Margins | 13.2% | -42.2% | 10.9% | 4.3% |
| Net Margins | 10.26% | -33.97% | 6.19% | 2.26% |
| Net Income (MM) | $2,300 | -$3,074 | $977 | $539 |
| Net Interest Expense (MM) | -$28 | -$317 | -$454 | -$123 |
| Depreciation & Amort. (MM) | -$1,219 | -$1,255 | -$1,272 | -$1,351 |
| Earnings Per Share | $4.27 | -$5.44 | $1.61 | $1.09 |
| EPS Growth | n/a | -227.4% | 129.6% | -32.3% |
| Diluted Shares (MM) | 539 | 565 | 607 | 595 |
| Free Cash Flow (MM) | $4,614 | -$1,040 | $2,833 | $7,736 |
| Capital Expenditures (MM) | -$627 | -$87 | -$511 | -$3,946 |
| Net Current Assets (MM) | -$10,089 | -$10,539 | -$7,870 | -$9,874 |
| Current Ratio | 0.67 | 2.02 | 1.97 | 1.43 |
| Long Term Debt (MM) | $1,846 | $10,111 | $10,274 | $8,046 |
| Net Debt / EBITDA | 0.04 | 2.29 | -0.74 | -0.77 |
Southwest Airlines Company has low leverage, weak revenue growth and increasing reinvestment in the business, and generally positive cash flows. However, Southwest Airlines Company has slimmer gross margins than its peers, consistently negative margins with a negative growth trend, and declining EPS growth. Finally, we note that Southwest Airlines Company has just enough current assets to cover current liabilities.
