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Southwest Airlines' 1Q17 Earnings: High Costs Prevent Takeoff

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Part 9
Southwest Airlines' 1Q17 Earnings: High Costs Prevent Takeoff PART 9 OF 9

What Does Southwest Airlines’ Current Valuation Indicate?

Current valuation

Southwest (LUV) has a forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 6.6x. This is slightly lower than its average valuation of 6.3x since September 2008. It is also higher than the industry median valuation of 6.3x.

What Does Southwest Airlines&#8217; Current Valuation Indicate?

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Peer comparison

American Airlines (AAL) and Alaska Air Group (ALK) are trading at similar valuations of 6.7x and 6.4x, respectively. They are followed by Southwest Airlines (LUV) at 6.5x and Spirit Airlines (SAVE) at 6.1x. United Continental (UAL) is trading at 5.5x and Delta Air Lines (DAL) is trading at 5.1x.

The market is expecting LUV to record an EBITDA per share growth rate of -3.2% in the next one year. AAL’s EBITDA are expected to fall 0.1%.

Our analysis

Southwest Airlines’ lower fare per passenger for the first quarter has come as a huge disappointment to investors. However, strong bookings and the Easter holidays have helped it provide buoyant guidance for 2Q17. In the short term, Southwest Airlines’ ability to achieve its guidance will play an important role.

Increasing costs have been another concern for investors. However, as discussed previously, this is a short-term problem. Southwest continues to be the most profitable airline in the US. Also, improving global travel and economic outlook would be a huge positive. Investors should watch out for those signs by following our airline industry insights.

Investors can gain exposure to Southwest Airlines by investing in the PowerShares DWA Consumer Cyclicals Momentum Portfolio (PEZ), which invests 3% of its portfolio in LUV stock.

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