Is Now The Time To Look At Buying Southwest Airlines Co. (NYSE:LUV)?

Today we're going to take a look at the well-established Southwest Airlines Co. (NYSE:LUV). The company's stock received a lot of attention from a substantial price movement on the NYSE over the last few months, increasing to US$37.20 at one point, and dropping to the lows of US$22.34. Some share price movements can give investors a better opportunity to enter into the stock, and potentially buy at a lower price. A question to answer is whether Southwest Airlines' current trading price of US$22.51 reflective of the actual value of the large-cap? Or is it currently undervalued, providing us with the opportunity to buy? Let’s take a look at Southwest Airlines’s outlook and value based on the most recent financial data to see if there are any catalysts for a price change.

Check out our latest analysis for Southwest Airlines

What's The Opportunity In Southwest Airlines?

Southwest Airlines is currently expensive based on my price multiple model, where I look at the company's price-to-earnings ratio in comparison to the industry average. I’ve used the price-to-earnings ratio in this instance because there’s not enough visibility to forecast its cash flows. The stock’s ratio of 26.98x is currently well-above the industry average of 10.14x, meaning that it is trading at a more expensive price relative to its peers. But, is there another opportunity to buy low in the future? Since Southwest Airlines’s share price is quite volatile, this could mean it can sink lower (or rise even further) in the future, giving us another chance to invest. This is based on its high beta, which is a good indicator for how much the stock moves relative to the rest of the market.

What kind of growth will Southwest Airlines generate?

Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. Buying a great company with a robust outlook at a cheap price is always a good investment, so let’s also take a look at the company's future expectations. With profit expected to more than double over the next couple of years, the future seems bright for Southwest Airlines. It looks like higher cash flow is on the cards for the stock, which should feed into a higher share valuation.

What This Means For You

Are you a shareholder? LUV’s optimistic future growth appears to have been factored into the current share price, with shares trading above industry price multiples. However, this brings up another question – is now the right time to sell? If you believe LUV should trade below its current price, selling high and buying it back up again when its price falls towards the industry PE ratio can be profitable. But before you make this decision, take a look at whether its fundamentals have changed.

Are you a potential investor? If you’ve been keeping tabs on LUV for some time, now may not be the best time to enter into the stock. The price has surpassed its industry peers, which means it is likely that there is no more upside from mispricing. However, the positive outlook is encouraging for LUV, which means it’s worth diving deeper into other factors in order to take advantage of the next price drop.

So while earnings quality is important, it's equally important to consider the risks facing Southwest Airlines at this point in time. Our analysis shows 3 warning signs for Southwest Airlines (1 is significant!) and we strongly recommend you look at these before investing.

If you are no longer interested in Southwest Airlines, you can use our free platform to see our list of over 50 other stocks with a high growth potential.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.