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Will Southwest Airlines Give Investors Some Love When It Reports?

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Part 7
Will Southwest Airlines Give Investors Some Love When It Reports? PART 7 OF 7

What Does Southwest Airlines’s Current Valuation Tell Us?

Current valuation

Currently, Southwest Airlines (LUV) is valued at 4.7x its forward EV-to-EBITDA1 ratio. Southwest Airlines’s current valuation is slightly lower than its average valuation of 4.8x since October 2008.

What Does Southwest Airlines&#8217;s Current Valuation Tell Us?

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Peer comparison

Currently, Southwest Airlines’s (LUV) peers have the following forward EV-to-EBITDA ratios:

  • Spirit Airlines (SAVE): 8.2x
  • Allegiant Travel (ALGT): 6.7x
  • Alaska Air Group (ALK): 5.6x
  • American Airlines (AAL): 5.5x
  • Delta Air Lines (DAL): 4.3x
  • United Continental (UAL): 4.2x
  • JetBlue Airways (JBLU): 3.8x

The market is expecting DAL to record EBITDA growth of 8.2% in the next year. AAL’s EBITDA is expected to fall 5%, UAL’s EBITDA is expected to fall 8%, and SAVE’s EBITDA is expected to fall 3%. 

ALK’s EBITDA is expected to rise 6%, LUV’s EBITDA is expected to rise 1%, JBLU’s EBITDA is expected to rise 8%, and ALGT’s EBITDA is expected to rise 1%.

Our analysis

Valuation multiples are dependent on the perceived risk and investors’ willingness to pay. In the short term, earnings results, LUV’s ability to maintain industry-leading utilization, yield performance, and margin performance will impact its valuation multiples.

However, the long-term valuation multiple will be affected by macro trends. Airlines are a cyclical industry, with typical boom and bust cycles. If industry fundamentals deteriorate or if investors’ risk appetites fall, valuation multiples can fall too.

Also, in a downturn, companies with high leverage become risky. Low-leverage companies can be rewarded in such times.

On the other hand, if fuel prices fall further or if demand keeps growing at high rates, airline stocks could actually see their valuation multiples improve.

Southwest Airlines (LUV) forms 0.86% holding of the iShares US Consumer Services ETF (IYC). You can also check analysts’ estimates for Delta Air Lines (DAL), Alaska Air Group (ALK), American Airlines (AAL), and United Continental (UAL).

  1. enterprise value divided by earnings before interest, tax, depreciation, and amortization
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