Is Southwest Airlines Worth a Closer Look After This Week’s 7% Rally?

• Wondering if now is the right time to buy, hold, or wait on Southwest Airlines? Let’s dig into what is really driving value beneath the surface.
• The stock recently increased by 7.1% in the last week and is up 4.4% over the past year. It is still down nearly 21% from five years ago, clear signs of shifting investor sentiment and possible changing risk factors.
• Ongoing headlines about the airline industry, from operational disruptions to evolving travel trends, have kept Southwest in the spotlight. Strategic decisions and industry shifts are helping steer the recent stock moves, so it pays to put this in context.
• When we run Southwest through our 6-point valuation check, the company scores 0/6 for “undervalued” metrics. On paper, there is room for skepticism. We will break down these standard approaches in a moment, but stick with us because a smarter way to look at value is coming up at the end of this piece.

Southwest Airlines scores just 0/6 on our valuation checks. See what other red flags we found in the full valuation breakdown.

Approach 1: Southwest Airlines Dividend Discount Model (DDM) Analysis

The Dividend Discount Model (DDM) estimates a stock's intrinsic value based on its future dividend payments, assuming those dividends grow at a consistent rate. For Southwest Airlines, the model analyzes the company’s current dividend per share (DPS) of $0.78 and incorporates a projected growth rate derived from its return on equity minus its hefty payout ratio.

Currently, Southwest has a return on equity (ROE) of just 4.46% and is distributing 92.04% of its earnings as dividends, leaving little room for reinvestment or robust growth. As a result, the model’s estimated future dividend growth is minimal, at only 0.35% per year. This conservative outlook on dividend growth means there is limited upside potential in the near term, according to the DDM's methodology (calculated as (1 - payout ratio) x ROE).

Using these inputs, the DDM estimates Southwest Airline’s fair value at just $8.13 per share. With the latest share price significantly higher, the analysis marks the stock as 299.1% overvalued by this method. The numbers suggest that, at current prices, Southwest’s dividends do not justify the stock’s valuation.

Result: OVERVALUED

Our Dividend Discount Model (DDM) analysis suggests Southwest Airlines may be overvalued by 299.1%. Discover 870 undervalued stocks or create your own screener to find better value opportunities.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Southwest Airlines.

Approach 2: Southwest Airlines Price vs Earnings

The Price-to-Earnings (PE) ratio is a preferred valuation tool for profitable companies like Southwest Airlines because it ties a company's share price directly to its earnings power. This makes it especially useful for businesses with established operating history and steady profitability, since it reflects how much investors are willing to pay for every dollar of earnings.

What constitutes a "normal" or "fair" PE ratio depends on expectations for growth, risk, and the overall industry. Companies with stronger growth prospects or less perceived risk generally command higher PE ratios, while those facing uncertainty or sluggish earnings growth tend to trade at lower multiples.

Southwest Airlines currently trades at a PE ratio of 44.28x. For context, the average PE ratio in the Airlines industry is 8.69x, and its direct peers average 10.23x. Clearly, Southwest’s valuation sits well above these common benchmarks.

This is where Simply Wall St's “Fair Ratio” comes in. The Fair Ratio, calculated specifically for Southwest, is 27.84x. Unlike simple industry or peer comparisons, the Fair Ratio blends factors such as the company's actual earnings growth, profit margins, unique business risks, size, and its place in the industry. This gives a more complete and nuanced gauge of what Southwest’s multiple should be in the current market context.

Comparing Southwest’s actual PE (44.28x) to its Fair Ratio (27.84x), the stock appears to be significantly overvalued by this approach.

Result: OVERVALUED

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1396 companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your Southwest Airlines Narrative

Earlier we mentioned there is an even better way to understand valuation, so let's introduce you to Narratives. A Narrative is your own personalized story about Southwest Airlines, built on your beliefs about the business, such as how revenues, margins, and strategies might evolve in the coming years. Each narrative is grounded with real financial forecasts that lead directly to your estimate of fair value.

Unlike traditional metrics, Narratives connect the “why” behind a company’s numbers to your view of the future, translating your perspective into a clear, data-driven analysis. Narratives are easy to create and share within the Simply Wall St Community, where millions of investors use them to express forecasts, update their investment theses, and sense-check changing assumptions against market news or fresh earnings releases.

This approach gives you practical, actionable insights, as Narratives make it simple to compare your own “Fair Value” with today’s market price. This can help you decide when it makes sense to buy, hold, or sell.

For example, some investors see strong revenue and margin expansion and currently set Southwest’s fair value as high as $46 per share. Others highlight competitive risks or execution challenges, leading to valuations as low as $19. With Narratives, you can pick the story and the numbers that fit your outlook.

Do you think there's more to the story for Southwest Airlines? Head over to our Community to see what others are saying!

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.

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