Southwest Airlines Company Annual Valuation – 2014 $LUV

southwest-airlines_200x200Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Undervalued Companies to Research for the Defensive Investor - October 2014.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Southwest Airlines Company (LUV) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Southwest Airlines Co. operates Southwest Airlines and AirTran Airways, passenger airlines that provide scheduled air transportation in the United States and near-international markets. As of December 31, 2012, the total fleet operated by Southwest and AirTran combined consisted of 694 aircraft, including 606 Boeing 737s and 88 Boeing 717s. Southwest principally provides point-to-point, rather than hub-and-spoke, service. AirTran principally provides hub-and-spoke, rather than point-to-point, service, with approximately half of AirTran’s flights originating or terminating at its base of operation in Atlanta, Georgia. AirTran also serves a number of markets with non-stop service from smaller bases of operation in Baltimore, Maryland; Milwaukee, Wisconsin; and Orlando, Florida. In December 2013, Southwest Airlines Co acquired 12 takeoff and landing slots at New York’s LaGuardia Airport being divested by American Airlines as part of its merger with US Airways.
LUV Chart

LUV data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 -FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - PASS
  6. Moderate PEmg ratio – PEmg is less than 20 - FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 - FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 - FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend - PASS
  5. Earnings growth – EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price $34.40
MG Value $39.78
MG Opinion Fairly Valued
Value Based on 3% Growth $14.98
Value Based on 0% Growth $8.78
Market Implied Growth Rate 12.40%
Net Current Asset Value (NCAV) -$11.54
PEmg 33.29
Current Ratio 0.76
PB Ratio 3.19

Balance Sheet – 6/30/2014

Current Assets $5,317,000,000
Current Liabilities $7,027,000,000
Total Debt $2,395,000,000
Total Assets $20,891,000,000
Intangible Assets $1,339,000,000
Total Liabilities $13,375,000,000
Outstanding Shares 698,000,000

Earnings Per Share

2014 (estimate) $1.71
2013 $1.05
2012 $0.56
2011 $0.23
2010 $0.61
2009 $0.13
2008 $0.24
2007 $0.84
2006 $0.61
2005 $0.60
2004 $0.38

Earnings Per Share – ModernGraham

2014 (estimate) $1.03
2013 $0.64
2012 $0.40
2011 $0.35
2010 $0.44
2009 $0.40

Dividend History
LUV Dividend Chart

LUV Dividend data by YCharts


Southwest Airlines does not qualify for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor is concerned with the low current ratio, along with the high PEmg and PB ratios.  The Enterprising Investor has concerns with the level of debt relative to the current assets.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities at this time.  From a valuation side of things, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $0.44 in 2010 to an estimated $1.03 for 2014.  This level of demonstrated growth supports the market’s implied estimate of 12.40% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value within a margin of safety relative to the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Southwest Airlines Co. (LUV)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Southwest Airlines Co. (LUV) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.






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