LUV

A Short Intro for Southwest Airlines Company Investors

It's been a great overnight session for Southwest Airlines Company investors, who saw their shares rise 4.2% to a price of $29.16 per share. At these higher prices, is the company still fairly valued? If you are thinking about investing, make sure to check the company's fundamentals before making a decision.

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 22.96 and an average price to book (P/B) ratio of 4.24. In contrast, Southwest Airlines Company has a trailing 12 month P/E ratio of 36.0 and a P/B ratio of 1.57.

When we divideSouthwest Airlines Company's P/E ratio by its expected five-year EPS growth rate, we obtain a PEG ratio of 0.68, 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:

2018 2019 2020 2021 2022 2023
Revenue (MM) $21,965 $22,428 $9,048 $15,790 $23,814 $25,440
Revenue Growth n/a 2.11% -59.66% 74.51% 50.82% 6.83%
Gross Margins 15% 13% -42% 11% 4% 1%
Operating Margins 15% 13% -42% 11% 4% 2%
Net Margins 11% 11% -34% 6% 2% 5%
Net Income (MM) $2,465 $2,465 -$3,074 $977 $539 $1,288
Net Interest Expense (MM) $131 $118 $349 $467 $340 $390
Depreciation & Amort. (MM) $1,201 $1,219 $1,255 $1,272 $1,351 $1,474
Earnings Per Share $4.29 $4.27 -$5.44 $1.61 $0.87 $0.8200000000000001
EPS Growth n/a -0.47% -227.4% 129.6% -45.96% -5.75%
Diluted Shares (MM) 574 539 565 609 642 649
Free Cash Flow (MM) $2,971 $2,960 -$1,642 $1,817 -$134 -$851
Capital Expenditures (MM) $1,922 $1,027 $515 $505 $3,924 $4,168
Current Ratio 0.64 0.67 2.02 1.97 1.43 1.21
Long Term Debt (MM) $2,771 $1,846 $10,111 $10,274 $8,046 $7,984
Net Debt / EBITDA 1.17 0.95 0.29 -0.56 -0.58 -0.68

Southwest Airlines Company has slimmer gross margins than its peers, weak operating margins with a negative growth trend, and declining EPS growth. On the other hand, the company benefits from low leverage and weak revenue growth and increasing reinvestment in the business. Furthermore, Southwest Airlines Company has irregular cash flows.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.

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