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Southwest Airlines: Should Value Investors Pick this Stock?

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Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?

One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put Southwest Airlines Co. (LUV - Free Report) stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks.

PE Ratio

A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.

On this front, Southwest Airlines has a trailing twelve months PE ratio of 14.22, as you can see in the chart below:



This level actually compares pretty favorably with the market at large, as the PE for the S&P 500 stands at about 20.48. If we focus on the long-term PE trend, Southwest Airlines’ current PE level puts it below its midpoint over the past five years, with the number having risen to some extent over the past few months.



Further, the stock’s PE compares favorably with the Zacks classified Transportation sector’s trailing twelve months PE ratio, which stands at 15.26. This indicates that the stock is relatively undervalued right now, compared to its peers.



Nonetheless, we should point out that LUV has a forward PE ratio (price relative to this year’s earnings) of 14.11, so it is fair to say that a slightly more value-oriented path may be ahead for LUV stock in the near term too.

P/S Ratio

Another key metric to note is the Price/Sales ratio. This approach compares a given stock’s price to its total sales, where a lower reading is generally considered better. Some people like this metric more than other value-focused ones because it looks at sales, something that is far harder to manipulate with accounting tricks than earnings.

Right now, Southwest Airlines has a P/S ratio of about 1.62. This is relatively lower than the S&P 500 average, which comes in at 3.10 right now.




LUV is actually in the higher zone of its trading range in the time period per the P/S metric, which suggests that the company’s stock price has already appreciated to some degree, relative to its sales.

Broad Value Outlook

In aggregate, Southwest Airlines currently has a Zacks Value Style Score of ‘B’, putting it into the top 40% of all stocks we cover from this look. This makes Southwest Airlines a solid choice for value investors.

What About the Stock Overall?

Though Southwest Airlines might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth grade of ‘D’ and a Momentum score of ‘D. This gives LUV a Zacks VGM score—or its overarching fundamental grade—of ‘C’. (You can read more about the Zacks Style Scores here >>)

Meanwhile, the company’s recent earnings estimates have been mixed at best. The current quarter has seen one estimates go higher in the past sixty days compared to three lower, while the full year estimate has seen five upward and only two downward revision in the same time period.

As a result, the current quarter consensus estimate has dipped by 5.9% in the past two months, while the full year estimate has revised upward by 1.9%. You can see the consensus estimate trend and recent price action for the stock in the chart below:

Southwest Airlines Company Price and Consensus

This somewhat mixed trend is why the stock has just a Zacks Rank #3 (Hold) and why we are looking for in-line performance from the company in the near term. It also indicates that though the stock’s growth story might be good over the long term, analysts have some apprehensions about the stock in the immediate future.

Bottom Line

Southwest Airlines is an inspired choice for value investors, as it is hard to beat its good lineup of statistics on this front. Moreover, a strong industry rank (Top 22% out of more than 250 industries) further supports the growth potential of the stock. In fact, over the past six months, the Zacks Transportation-Airline industry has outperformed the broader market, as you can see below:



So, despite a Zacks Rank #3, we believe that favorable industry factors make this value stock a compelling pick.

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