Investing in Southwest Airlines Stock: A Case Against It
Southwest Airlines' Stock Soars: In an unexpected move, Southwest Airlines (NYSE: LUV) saw a staggering 8% surge on March 11, 2025. Why? The airline dropped its longstanding free baggage policy, opting to charge some passengers for checked bags. This shift, aimed at boosting revenue, comes in response to less-than-stellar financial results that have put the company under pressure to revamp its business strategy.
Disappointing financial results and weak guidance may add to the worry about future market performance. If you're curious about the impact on another stock, such as Oracle, you might want to check out Will Oracle Stock Dive to $110?
A Hard Look at LUV Stock: At the current $30 price point, LUV stock appears unappealing based on its financials. Despite the baggage fee announcement, LUV's valuation concerns remain unaltered. Let's examine some reasons why:
- LUV’s valuation ratios—price-to-sales, price-to-operating income, and price-to-earnings—are higher compared to the broader market, hinting at an overvalued stock.
- While Southwest Airlines witnessed some growth in revenues over the past years, its profit margins are significantly lower compared to most companies.
- The company's operating income, operating cash flow, and OCF-to-sales ratio are far below industry averages.
- Southwest Airlines' balance sheet is stable, but its Debt-to-Equity Ratio is higher than the S&P 500 average.
- When it comes to downturn resilience, LUV stock has fared worse than the S&P 500 during some market crashes.
Analyzing all these factors, we can conclude that Southwest Airlines' overall performance is weak, with poor growth, profitability, financial stability, and downturn resilience, making LUV stock a questionable investment choice.
Trefis' High-Quality Portfolio could be an appealing alternative for those seeking returns with lower volatility compared to individual stocks. The portfolio has outperformed the S&P 500, generating returns exceeding 91% since its inception.
Comparing LUV Valuation with the S&P 500:LUV stock looks slightly expensive compared to the broader market in terms of what you pay per dollar of sales or profit.
- Southwest Airlines has a price-to-sales ratio of 0.7, while the S&P 500's figure stands at 3.2.
- The company's price-to-operating income ratio is 57.9 compared to 24.3 for S&P 500.
- Southwest Airlines has a price-to-earnings ratio of 40.2 vs. the benchmark's 24.3.
Recent Revenue Growth:- Over the past three years, Southwest Airlines has seen an average growth rate of 21.9% in its revenues.- In the last 12 months, revenues grew by 5.3% from $26 billion to $27 billion.- Quarterly revenues grew 1.6% to $6.9 billion in the most recent quarter from $6.8 billion a year ago.
Google's Android Decision: Bad News for All Samsung & Pixel Users
NYT Mini Today: Hints, Clues, and Answers for March 12
Social Security Overpayments: 100% Withholding May Leave Seniors Broke
- The baggage fee announcement by Southwest Airlines may have boosted their revenue, but concerns over the airline's valuation, profitability, financial stability, and downturn resilience still remain, making LUV stock questionable.
- In contrast to Southwest Airlines' valuation ratios, which suggest an overvalued stock, the S&P 500's price-to-sales, price-to-operating income, and price-to-earnings ratios are significantly lower, indicating a potentially better investment opportunity.
- Despite recent revenue growth, Southwest Airlines has less-than-impressive profit margins, lower operating income, operating cash flow, and OCF-to-sales ratio compared to industry averages, which adds to the worry about its future performance.
