Southwest Airlines Stock: Historically Low Forward EBITDA Valuation

I am bullish on Southwest Airlines (LUV) as it looks attractively priced relative to its historical averages, Wall Street analysts are bullish on it, and its average price target implies solid upside potential.

Southwest Airlines is an American airline company that was founded in 1966 and is currently headquartered in Texas, United States. The company was first named Air Southwest Company in 1967, and the current name was adopted in 1971.

The founding members of Southwest Airlines were Rollin King and Herbert Kelleher. Since the company mostly offers short routes to its customers, its passenger planes provide air transportation within the United States and to some nearby international airports.

LUV’s primary unique features include its low-fare pricing model, frequent flights, and no-frills air service. Southwest Airlines strives to offer the highest quality customer service to its customers.

Strengths

Southwest Airlines’ relatively low prices put this company at the forefront among most of its competitors. Its pricing strategy has also landed the company several loyal customers who prefer traveling at budget-friendly rates. Its customer service has also helped in this regard, generating a significant customer base with superior services on flights.

It has also been consistently listed as one of the best employers in the United States, including in the Forbes’ America’s Best Employers 2019, where the company was on number two on the list. The company’s brand value is one of its most significant advantages, followed by its consistent profitability.

Recent Results

In the fourth quarter that ended in December, the company’s revenues reached $5.05 billion, or year-over-year growth of 150.9% compared to Q4 2020. However, compared to 2019, the revenues saw a year-over-year decline of 11.8%. In 2019, the net income totaled $2.3 billion compared to $977 million for the full 2021 year.

The basic and diluted net income per share in Q4 2021 reached $0.11 each. In the full fiscal year, the basic and diluted net income per share came in at $1.65 and $1.61, respectively. The 2021 financial results can be linked to the massive increase in trips flown, which were at 200,954 in Q4 2020 and 299,481 in Q4 2021.

Valuation Metrics

LUV stock looks undervalued here as it trades below its three-year valuation multiple averages on a forward enterprise-value-to-EBITDA basis, though it is elevated on its forward price-to-normalized-earnings ratio. Its forward EV/EBITDA ratio is 9.1 times compared to its historical average of 23.5 times, and its forward price-to-normalized-earnings ratio is 39.2 times compared to its historical average of 22.1 times.

Moving forward, analysts expect EBITDA to increase by 12.3% and normalized earnings per share to increase by 154.6% over the next twelve months.

Wall Street’s Take

Turning to Wall Street, LUV earns a Moderate Buy consensus rating based on eight Buys, seven Holds, and one Sell rating in the past three months. Additionally, the average Southwest Airlines price target of $52.4 puts the upside potential at 14%.

Summary and Conclusions

LUV stock looks attractively priced based on numerous metrics. It trades at a discount to its historical forward EV/EBITDA valuation multiple average, Wall Street analysts are generally bullish on it, and the average price target implies good upside potential over the next twelve months.

That said, LUV operates in a sector that is highly competitive and continues to face headwinds from COVID-19 regulations and high fuel prices. While the company is expected to emerge well from COVID-19 headwinds, it remains somewhat of a speculative bet until it proves it can do that. That said, it looks like it might be a good time to add shares here.

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