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:
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 12.11, 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 19.76. If we focus on the long-term PE trend, Southwest Airlines’ current PE level puts it below its midpoint over the past five years.
Further, the stock’s PE compares favorably with the Zacks Transportation sector’s trailing twelve months PE ratio, which stands at 15.9. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
We should also point out that Southwest Airlines has a forward PE ratio (price relative to this year’s earnings) of just 12.23, which is tad higher than the current level. So it is fair to expect an increase in the company’s share price in the near term.
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 1.29. This is lower than the S&P 500 average, which comes in at 3.42 right now. Also, as we can see in the chart below, this is below the highs for this stock in particular over the past few years.
If anything, LUV is in the lower end of its range in the time period from a P/S metric, suggesting some level of overvalued trading—at least compared to historical norms.
Broad Value Outlook
In aggregate, Southwest Airlines currently has a Zacks Value 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 Score of B and a Momentum Score of B. This gives LUV a Zacks VGM score — or its overarching fundamental grade — of A. (You can read more about the Zacks Style Scores here >>)
Meanwhile, the company’s recent earnings estimates have been mixed at best. The current year has seen two estimates go lower in the past sixty days compared to nine higher, while the full year 2020 estimate has seen nine downward revision compared to no upward in the same time period.
This has had a notable impact on the consensus estimate though as the current year consensus estimate has improved by 3.7% in the past two months, while the full year 2020 estimate has decreased by 2.7%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
Southwest Airlines Co. Price and Consensus
Southwest Airlines Co. price-consensus-chart | Southwest Airlines Co. Quote
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.
Southwest Airlines is an inspired choice for value investors, as it is hard to beat its incredible line up of statistics on this front. A strong industry rank (among top 29% of more than 250 industries) further instils our confidence.
However, a Zacks Rank #3 makes it hard to get too excited about this company overall. In fact, over the past two years, the Zacks Transportation - Airline has clearly underperformed the market at large, as you can see below:
So, value investors might want to wait for industry trends to turn favorable in this name first, but once that happens, this stock could be a compelling pick.
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Southwest Airlines Co. (LUV) : Free Stock Analysis Report
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