Is Southwest Airlines Co.'s (NYSE:LUV) Future Growth Already Accounted For In Today's Price?

Southwest Airlines Co. (NYSE:LUV) closed yesterday at $52.3, which left some investors asking whether the high earnings potential can still be justified at this price. Below I will be talking through a basic metric which will help answer this question.

See our latest analysis for Southwest Airlines

Where's the growth?

According to the analysts covering the company, the following few years should bring about good growth prospects for Southwest Airlines. The consensus forecast from 17 analysts is buoyant with earnings forecasted to rise significantly from today's level of $4.317 to $6.372 over the next three years. This results in an annual growth rate of 10%, on average, which illustrates an optimistic outlook in the near term.

Is LUV available at a good price after accounting for its growth?

Southwest Airlines is available at a price-to-earnings ratio of 12.12x, showing us it is undervalued relative to the current US market average of 17.3x , and overvalued based on current earnings compared to the Airlines industry average of 8.81x .

We understand LUV seems to be overvalued based on its current earnings, compared to its industry peers. But, seeing as Southwest Airlines is perceived as a high-growth stock, we must also account for its earnings growth, which is captured in the PEG ratio. A PE ratio of 12.12x and expected year-on-year earnings growth of 10% give Southwest Airlines an acceptable PEG ratio of 1.16x. Based on this growth, Southwest Airlines's stock can be considered slightly overvalued , based on its fundamentals.

What this means for you:

LUV's current overvaluation could signal a potential selling opportunity to reduce your exposure to the stock, or it you're a potential investor, now may not be the right time to buy. However, basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PEG ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:

1. Financial Health: Are LUV’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
2. Past Track Record: Has LUV been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of LUV's historicals for more clarity.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.