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Is Southwest Airlines a Great Stock for Value Investors?

Zacks Equity Research

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 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 15.31, 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 20.20. 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.

However, the stock’s PE compares unfavorably with the Zacks classified Transportation-Airline industry’s trailing twelve months PE ratio, which stands at 9.82. This indicates that the stock is relatively overvalued 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 14.99, 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 1.74. This is relatively lower than the S&P 500 average, which comes in at 3.18 right now. Also, as we can see in the chart below, this is in-line with the highs for this stock in particular over the past few years.

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 ‘C’. 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 trending higher. The current quarter has seen four estimates go higher in the past sixty days compared to none lower, while the full year estimate has seen eight upward and only one downward revision in the same time period.

This has also had an impact on the consensus estimate though as the current quarter consensus estimate has risen by 12.5% in the past two months, while the full year estimate has revised upward by 7.8%. You can see the consensus estimate trend and recent price action for the stock in the chart below:

Southwest Airlines Company Price and Consensus

Southwest Airlines Company Price and Consensus | Southwest Airlines Company Quote

This positive trend signifies bullish analyst sentiment, and its Zacks Rank #2 (Buy) indicates robust fundamentals and expectations of outperformance in the near term.

Bottom Line

Southwest Airlines is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. With a formidable industry rank (among the Top 24%) and strong Zacks Rank, Southwest Airlines looks like a strong value contender. In fact, over the past three years, the Zacks Transportation-Airline industry has clearly outperformed the broader market, as you can see below:

So, it might pay for value investors to delve deeper into the company’s prospects, as fundamentals indicate that this stock could be a compelling pick.

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