Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewing theÂ 10 Most Undervalued Companies for the Defensive Investor – SeptemberÂ 2015.Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a stock analysis showing a specific look at how Southwest Airlines Company (LUV)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance): Southwest Airlines Co. operates Southwest Airlines (Southwest). Southwest is a passenger airline that provides scheduled air transportation in the United States and near-international markets. The Company serves around 93 destinations in 40 states and runs international services to Montego Bay, Nassau, Oranjestad, Cabo San Lucas/Los Cabos, Cancun, Mexico City and Punta Cana. It serves around 17 non-stop destinations and 581 non-stop city pairs. It operates around 665 Boeing 737 aircrafts. It provides several products, such as Business Select, Fly By Priority Lanes and SWABIZ. Its Website, southwest.com, enables purchasing and managing travel online. It offers southwest.com and swabiz.com in a translated Spanish version. Southwest provides inflight satellite-based wireless fidelity (Wi-Fi) service and live television. Its service offerings include EarlyBird Check-In, Pets Are Welcome on Southwest (P.A.W.S.) products, Automated Outbound Messaging (AOM) service and southwest.com/rebook.
Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Here is aÂ free sample valuation pdf, and here is a post detailing what can be found within each individual company’s valuation.
Downloadable PDF version of this valuation:
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
|Defensive Investor; must pass 6 out of the following 7 tests.|
|1. Adequate Size of the Enterprise||Market Cap > $2Bil||$27,119,760,526||Pass|
|2. Sufficiently Strong Financial Condition||Current Ratio > 2||0.67||Fail|
|3. Earnings Stability||Positive EPS for 10 years prior||Pass|
|4. Dividend Record||Dividend Payments for 10 years prior||Pass|
|5. Earnings Growth||Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end||250.30%||Pass|
|6. Moderate PEmg Ratio||PEmg < 20||22.62||Fail|
|7. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||3.86||Fail|
|Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.|
|1. Sufficiently Strong Financial Condition||Current Ratio > 1.5||0.67||Fail|
|2. Sufficiently Strong Financial Condition||Debt to NCA < 1.1||-1.06||Fail|
|3. Earnings Stability||Positive EPS for 5 years prior||Pass|
|4. Dividend Record||Currently Pays Dividend||Pass|
|5. Earnings Growth||EPSmg greater than 5 years ago||Pass|
Stage 2: Determination of Intrinsic Value
|MG Growth Estimate||15.00%|
|MG Value based on 3% Growth||$26.30|
|MG Value based on 0% Growth||$15.42|
|Market Implied Growth Rate||7.06%|
|% of Intrinsic Value||58.75%|
Southwest Airlines CompanyÂ does not qualify for either theÂ Enterprising Investor orÂ the more conservative Defensive Investor. Â The Defensive Investor is concerned with the low current ratioÂ and the high PEmg and PB ratios. Â The Enterprising Investor is concerned by the level of debt relative to the current assets.Â As a result, all value investorsÂ following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities at this time or proceed with a cautious speculative attitude.
As for a valuation,Â the company appears to be undervalued after growingÂ itsÂ EPSmg (normalized earnings) from $0.35 in 2011 to an estimated $1.81 for 2015. Â This level of demonstrated earnings growthÂ is better thanÂ the market’s implied estimate of 7.06% annual earnings lossÂ over the next 7-10 years.Â As a result, the ModernGrahamÂ valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value aboveÂ the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Southwest Airlines Company (LUV)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
Stage 3: Information for Further Research
|Net Current Asset Value (NCAV)||-$13.85|
|Number of Consecutive Years of Dividend Growth||4|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Total Current Assets||$4,596,000,000|
|Total Current Liabilities||$6,876,000,000|
|Shares Outstanding (Diluted Average)||673,000,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$3.23|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$1.81|
Other ModernGraham posts about the company
|18 Companies in the Spotlight This Week â€“ 10/25/14|
|Southwest Airlines Company Annual Valuation â€“ 2014 $LUV|
|Overvalued Company of the Week â€“ Southwest Airlines (LUV)|
Other ModernGraham posts about related companies
|Alaska Air Group Inc. Analysis â€“ Initial Coverage $ALK|
|American Airlines Group Analysis â€“ 2015 Initial Coverage $AAL|
|Delta Air Lines Inc. Annual Valuation â€“ 2015 $DAL|
|Southwest Airlines Company Annual Valuation â€“ 2014 $LUV|
The author did not hold aÂ position in any company mentioned in this articleÂ at the time of publication and had no intention of changing that position within the next 72 hours. Â See my current holdings here. Â This article is not investment advice; any reader should speak to aÂ registeredÂ investment adviser prior to making any investment decisions. Â ModernGraham is not affiliated with the company in any manner. Â Please be sure to review our detailed disclaimer.