Is Now The Time To Look At Buying Southwest Airlines Co. (NYSE:LUV)?

Simply Wall St

Today we're going to take a look at the well-established Southwest Airlines Co. (NYSE:LUV). The company's stock saw significant share price movement during recent months on the NYSE, rising to highs of US$58.54 and falling to the lows of US$48.90. Some share price movements can give investors a better opportunity to enter into the stock, and potentially buy at a lower price. A question to answer is whether Southwest Airlines's current trading price of US$48.90 reflective of the actual value of the large-cap? Or is it currently undervalued, providing us with the opportunity to buy? Let’s take a look at Southwest Airlines’s outlook and value based on the most recent financial data to see if there are any catalysts for a price change.

Check out our latest analysis for Southwest Airlines

What's the opportunity in Southwest Airlines?

The share price seems sensible at the moment according to my price multiple model, where I compare the company's price-to-earnings ratio to the industry average. In this instance, I’ve used the price-to-earnings (PE) ratio given that there is not enough information to reliably forecast the stock’s cash flows. I find that Southwest Airlines’s ratio of 11.44x is trading slightly above its industry peers’ ratio of 6.89x, which means if you buy Southwest Airlines today, you’d be paying a relatively reasonable price for it. And if you believe that Southwest Airlines should be trading at this level in the long run, then there should only be a fairly immaterial downside vs other industry peers. Although, there may be an opportunity to buy in the future. This is because Southwest Airlines’s beta (a measure of share price volatility) is high, meaning its price movements will be exaggerated relative to the rest of the market. If the market is bearish, the company’s shares will likely fall by more than the rest of the market, providing a prime buying opportunity.

What does the future of Southwest Airlines look like?

NYSE:LUV Past and Future Earnings, February 27th 2020

Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. Although value investors would argue that it’s the intrinsic value relative to the price that matter the most, a more compelling investment thesis would be high growth potential at a cheap price. With profit expected to grow by 24% over the next couple of years, the future seems bright for Southwest Airlines. It looks like higher cash flow is on the cards for the stock, which should feed into a higher share valuation.

What this means for you:

Are you a shareholder? It seems like the market has already priced in LUV’s positive outlook, with shares trading around industry price multiples. However, there are also other important factors which we haven’t considered today, such as the financial strength of the company. Have these factors changed since the last time you looked at LUV? Will you have enough conviction to buy should the price fluctuate below the industry PE ratio?

Are you a potential investor? If you’ve been keeping tabs on LUV, now may not be the most optimal time to buy, given it is trading around industry price multiples. However, the optimistic forecast is encouraging for LUV, which means it’s worth diving deeper into other factors such as the strength of its balance sheet, in order to take advantage of the next price drop.

Price is just the tip of the iceberg. Dig deeper into what truly matters – the fundamentals – before you make a decision on Southwest Airlines. You can find everything you need to know about Southwest Airlines in the latest infographic research report. If you are no longer interested in Southwest Airlines, you can use our free platform to see my list of over 50 other stocks with a high growth potential.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.