Is The Market Pricing Southwest Fairly?

+21.60%
Upside
29.19
Market
35.50
Trefis
LUV: Southwest Airlines logo
LUV
Southwest Airlines

Southwest Airlines (NYSE:LUV) is one of the largest air carriers in the U.S. In 2017, the company, like many of its competitors, took a heavy hit through the second half of the year on adverse weather conditions that hurt operations in many key markets. Further, earlier in the year, investors punished the stock for weaker than expected guidance figures. However, despite all this volatility, the airline managed to end the year at a higher price than the beginning. At present, the stock is trading around $56. That said, we feel that the price has much room for growth.

According to our calculations, we estimate the stock price should be around $61, or about 8% above the current market price. We have created an interactive dashboard analysis to estimate Southwest’s valuation based on its expected revenue for FY 2018. Click on the link to modify the figures to arrive at your own price estimate.

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In general, Southwest derives its revenues from three sources – Mainline, Freight and Other. While Freight revenues are expected to increase positively, we believe that Mainline and Other revenues are going to be the primary revenue drivers.

Overall, Mainline revenues are expected to grow on higher demand for air travel. With an improving economy, both business and leisure travel are expected to grow significantly in the year. Further, the company, as part of its expansion plans, is very close to launching flights to Hawaii. We expect increased ticket revenue sales, in this respect.

The primary component of Other revenue is fees from reservation changes and excess baggage charged to customers. Therefore, with increased passenger miles, revenues in the division are bound to increase in a similar proportion.

All in all, it seems that, in comparison to last year, Southwest can hope for steady growth in its stock price. While it is undervalued at the moment, we can see the price rise in the coming months.

 

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