Benjamin 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 10 Stocks for Using A Benjamin Graham Value Investing Strategy – February 2017. 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 stock analysis showing a specific look at how Southwest Airlines Co (LUV) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Southwest Airlines Co. (Southwest) operates Southwest Airlines. Southwest is a passenger airline that provides scheduled air transportation in the United States and near-international markets. The Company serves approximately 100 destinations in over 40 states, such as the District of Columbia, the Commonwealth of Puerto Rico, and approximately seven near-international countries, including Mexico, Jamaica, The Bahamas, Aruba, Dominican Republic, Costa Rica, and Belize. The Company added its first three destinations in Central America (San Jose, Costa Rica, Belize City, Belize, and Liberia, Costa Rica) and also commenced Southwest service to a fourth destination in Mexico (Puerto Vallarta). Southwest operates a total of approximately 704 Boeing 737 aircraft. The Company also added approximately 20 domestic nonstop destinations from Dallas Love Field. Southwest offers a total of 180 weekday departures to 50 nonstop destinations from Dallas Love Field.
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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||$32,503,724,300||Pass|
|2. Sufficiently Strong Financial Condition||Current Ratio > 2||0.66||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||968.37%||Pass|
|6. Moderate PEmg Ratio||PEmg < 20||17.04||Pass|
|7. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||3.97||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||0.66||Fail|
|2. Sufficiently Strong Financial Condition||Debt to NCA < 1.1||-1.20||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||$45.04|
|MG Value based on 0% Growth||$26.40|
|Market Implied Growth Rate||4.27%|
|% of Intrinsic Value||44.25%|
Southwest Airlines Co does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, high PB ratio. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.
As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $0.64 in 2013 to an estimated $3.11 for 2017. This level of demonstrated earnings growth outpaces the market’s implied estimate of 4.27% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value above the price.
At the time of valuation, further research into Southwest Airlines Co revealed the company was trading above its Graham Number of $33.56. The company pays a dividend of $0.38 per share, for a yield of 0.7% Its PEmg (price over earnings per share – ModernGraham) was 17.04, which was below the industry average of 17.26, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-16.35.
Southwest Airlines Co receives an average overall rating in the ModernGraham grading system, scoring a C-.
Stage 3: Information for Further Research
|Net Current Asset Value (NCAV)||-$16.35|
|Number of Consecutive Years of Dividend Growth||6|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Balance Sheet Information||12/1/2016|
|Total Current Assets||$4,498,000,000|
|Total Current Liabilities||$6,844,000,000|
|Shares Outstanding (Diluted Average)||633,000,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$3.65|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$3.11|
Other ModernGraham posts about the company
|Southwest Airlines Company Valuation – October 2015 Update $LUV|
|18 Companies in the Spotlight This Week – 10/25/14|
|Southwest Airlines Company Annual Valuation – 2014 $LUV|
|Overvalued Company of the Week – Southwest Airlines (LUV)|
Other ModernGraham posts about related companies
The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. See my current holdings here. This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions. ModernGraham is not affiliated with the company in any manner. Please be sure to review our detailed disclaimer.