Southwest Airlines (LUV): Assessing Valuation Following Earnings Miss and Cautious Outlook

Southwest Airlines (LUV) is in the spotlight this week after releasing second-quarter numbers that fell short of what the market was expecting. Both revenue and profits slipped year over year, and management signaled that demand could remain soft through the next quarter. At the same time, Southwest announced a new $2.0 billion share repurchase plan and outlined cost cuts aimed at saving $370 million in 2025. These announcements give investors several factors to consider as they evaluate the company’s path forward.

The earnings miss and cautious outlook follow a stretch of mixed signals from Southwest. On one hand, the company is pursuing new routes and expanding vacation and rewards products. On the other hand, profitability and momentum have lagged. In the past year, the stock has climbed 19%, a move that stands out after several years of declines, though recent months have been flat to down. Demand headwinds and inflation continue to moderate what had appeared to be a rebound story, even as management aims to unlock value through share buybacks.

After a year of uneven but positive returns, some investors may be asking whether the current uncertainty is already reflected in the stock’s price or if there is potential for long-term investors looking for a possible turnaround.

Most Popular Narrative: 2.9% Overvalued

According to community narrative, Southwest Airlines is considered slightly overvalued, with a current share price sitting just above consensus fair value based on future earnings projections and profit margins.

The analysts have a consensus price target of $31.86 for Southwest Airlines based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement among analysts, with the most bullish reporting a price target of $46.0 and the most bearish reporting a price target of just $19.0.

Want to peek behind the curtain of this fair value estimate? The valuation hinges on ambitious earnings growth and margin expansion targets, but relies on tough assumptions that fuel debate among analysts. How likely are these numbers? The full narrative breaks down the scenario that justifies today’s share price and pinpoints what could drive explosive gains or surprise disappointments.

Result: Fair Value of $31.86 (OVERVALUED)

Have a read of the narrative in full and understand what's behind the forecasts.

However, risks such as ongoing economic uncertainty and delays in aircraft deliveries could present challenges to these optimistic projections for Southwest’s future growth.

Find out about the key risks to this Southwest Airlines narrative.

Another View: Discounted Cash Flow Model

While analysts suggest the stock is slightly overvalued based on future earnings and margins, our SWS DCF model presents a much more cautious perspective. This suggests Southwest Airlines could be priced significantly above its fundamentals. Which lens better reflects reality?

Look into how the SWS DCF model arrives at its fair value.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Southwest Airlines for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover undervalued stocks based on their cash flows. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Build Your Own Southwest Airlines Narrative

If you want to form your own perspective or dig deeper into the numbers, you can build a custom Southwest Airlines narrative in just a few minutes. do it your way.

A great starting point for your Southwest Airlines research is our analysis highlighting 2 key rewards and 1 important warning sign that could impact your investment decision.

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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.

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