Southwest Airlines (NYSE:LUV) stock surged 8% on Tuesday, March 11, after it announced that it will begin charging certain customers for checked bags, abandoning its distinctive free baggage policy. This change comes as disappointing financial results have increased pressure on the airline to transform its business approach.
At levels of $30, LUV stock is unattractive based on its financials, and the recent announcement does little to change that. We believe there are several major concerns with LUV stock, which makes it very unattractive given that its current valuation looks high.
We arrive at our conclusion by comparing the current valuation of LUV stock with its operating performance over the recent years as well as its current and historical financial condition. Our analysis of Southwest Airlines along key parameters of Growth, Profitability, Financial Stability, and Downturn Resilience shows that the company has a very weak operating performance and financial condition, as detailed below. That said, if you seek upside with lower volatility than individual stocks, the Trefis High-Quality portfolio presents an alternative – having outperformed the S&P 500 and generated returns exceeding 91% since its inception.
How does Southwest Airlines’ valuation look vs. the S&P 500?
Going by what you pay per dollar of sales or profit, LUV stock looks slightly expensive compared to the broader market.
• Southwest Airlines has a price-to-sales (P/S) ratio of 0.7 vs. a figure of 3.2 for the S&P 500
• Additionally, the company’s price-to-operating income (P/EBIT) ratio is 57.9 compared to 24.3 for S&P 500
• And, it has a price-to-earnings (P/E) ratio of 40.2 vs. the benchmark’s 24.3
How have Southwest Airlines’ revenues grown over recent years?
Southwest Airlines’ Revenues have seen some growth over recent years.
• Southwest Airlines has seen its top line grow at an average rate of 21.9% over the last 3 years (vs. an increase of 6.9% for S&P 500)
• Its revenues have grown 5.3% from $26 Bil to $27 Bil in the last 12 months (vs. growth of 5.2% for S&P 500)
• Also, its quarterly revenues grew 1.6% to $6.9 Bil in the most recent quarter from $6.8 Bil a year ago (vs. 5.0% improvement for S&P 500)
How profitable is Southwest Airlines?
Southwest Airlines’ profit margins are considerably worse than most companies in the Trefis coverage universe.
• Southwest Airlines’ Operating Income over the last four quarters was $321 Mil, which represents a very poor Operating Margin of 1.2% (vs. 13.0% for S&P 500)
• Southwest Airlines’ Operating Cash Flow (OCF) over this period was $462 Mil, pointing to a very poor OCF-to-Sales Ratio of 1.7% (vs. 15.7% for S&P 500)
Does Southwest Airlines look financially stable?
Southwest Airlines’ balance sheet looks fine.
• Southwest Airlines’ Debt figure was $8.1 Bil at the end of the most recent quarter, while its market capitalization is $18 Bil (as of 3/11/2025). This implies a poor Debt-to-Equity Ratio of 43.4% (vs. 19.0% for S&P 500). [Note: A lower Debt-to-Equity Ratio is desirable]
• Cash (including cash equivalents) makes up $8.7 Bil of the $34 Bil in Total Assets for Southwest Airlines. This yields a strong Cash-to-Assets Ratio of 25.9% (vs. 14.8% for S&P 500)
How resilient is LUV stock during a downturn?
LUV stock has fared worse than the benchmark S&P 500 index during some of the recent downturns. Worried about the impact of a market crash on LUV stock? Our dashboard How Low Can Stocks Go During A Market Crash captures how key stocks fared during and after the last six market crashes.
Inflation Shock (2022)
• LUV stock fell 36.3% from a high of $48.38 on 21 April 2022 to $30.84 on 2 October 2022, vs. a peak-to-trough decline of 25.4% for the S&P 500
• The stock is yet to recover to its pre-Crisis high
• The highest the stock has reached since then is $40.08 on 1 December 2022 and currently trades at around $30
Covid Pandemic (2020)
• LUV stock fell 46.0% from a high of $57.11 on 19 February 2020 to $30.86 on 19 March 2020, vs. a peak-to-trough decline of 33.9% for the S&P 500
• The stock fully recovered to its pre-Crisis peak by 24 February 2021
Global Financial Crisis (2008)
• LUV stock fell 69.6% from a high of $16.47 on 5 August 2008 to $5.01 on 5 March 2009, vs. a peak-to-trough decline of 56.8% for the S&P 500
• The stock fully recovered to its pre-Crisis peak by 24 October 2013
Putting all the pieces together: What it means for LUV stock
In summary, Southwest Airlines’ performance across the parameters detailed above are as follows:
• Growth: Strong
• Profitability: Extremely Weak
• Financial Stability: Neutral
• Downturn Resilience: Very Weak
• Overall: Weak
In addition, keeping in mind its high valuation, we think that the stock is very unattractive, which supports our conclusion that LUV is a very bad stock to buy.
While you would do well to avoid LUV stock for now, you could explore the Trefis Reinforced Value (RV) Portfolio, which has outperformed its all-cap stocks benchmark (combination of the S&P 500, S&P mid-cap, and Russell 2000 benchmark indices) to produce strong returns for investors. Why is that? The quarterly rebalanced mix of large-, mid- and small-cap RV Portfolio stocks provided a responsive way to make the most of upbeat market conditions while limiting losses when markets head south, as detailed in RV Portfolio performance metrics.
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