Intrinsic value of Southwest Airlines - LUV

Previous Close

$55.31

  Intrinsic Value

$71.90

stock screener

  Rating & Target

buy

+30%

  Value-price divergence*

+145%

Previous close

$55.31

 
Intrinsic value

$71.90

 
Up/down potential

+30%

 
Rating

buy

 
Value-price divergence*

+145%

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of LUV stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 33.7

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  3.05
  2.00
  2.30
  2.57
  2.81
  3.03
  3.23
  3.41
  3.57
  3.71
  3.84
  3.95
  4.06
  4.15
  4.24
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.64
  4.67
  4.70
  4.73
  4.76
  4.78
  4.81
  4.83
  4.84
  4.86
Revenue, $m
  20,425
  20,834
  21,313
  21,860
  22,475
  23,157
  23,904
  24,718
  25,600
  26,549
  27,568
  28,658
  29,821
  31,059
  32,376
  33,772
  35,252
  36,819
  38,476
  40,226
  42,074
  44,025
  46,081
  48,249
  50,533
  52,939
  55,472
  58,138
  60,944
  63,895
  67,000
Variable operating expenses, $m
 
  16,498
  16,875
  17,307
  17,791
  18,327
  18,916
  19,557
  20,250
  20,998
  21,800
  22,561
  23,477
  24,452
  25,488
  26,587
  27,752
  28,986
  30,290
  31,668
  33,123
  34,658
  36,278
  37,984
  39,783
  41,676
  43,671
  45,769
  47,978
  50,302
  52,746
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  16,665
  16,498
  16,875
  17,307
  17,791
  18,327
  18,916
  19,557
  20,250
  20,998
  21,800
  22,561
  23,477
  24,452
  25,488
  26,587
  27,752
  28,986
  30,290
  31,668
  33,123
  34,658
  36,278
  37,984
  39,783
  41,676
  43,671
  45,769
  47,978
  50,302
  52,746
Operating income, $m
  3,760
  4,335
  4,437
  4,554
  4,685
  4,830
  4,989
  5,162
  5,349
  5,551
  5,768
  6,097
  6,344
  6,608
  6,888
  7,185
  7,500
  7,833
  8,186
  8,558
  8,951
  9,366
  9,804
  10,265
  10,751
  11,263
  11,802
  12,369
  12,966
  13,594
  14,254
EBITDA, $m
  4,981
  5,612
  5,741
  5,889
  6,054
  6,238
  6,439
  6,658
  6,896
  7,152
  7,426
  7,720
  8,033
  8,366
  8,721
  9,097
  9,496
  9,918
  10,364
  10,836
  11,334
  11,859
  12,413
  12,997
  13,612
  14,260
  14,943
  15,661
  16,416
  17,211
  18,048
Interest expense (income), $m
  100
  103
  113
  125
  139
  154
  170
  189
  209
  230
  253
  278
  305
  334
  364
  396
  430
  467
  505
  545
  588
  634
  681
  732
  785
  841
  900
  962
  1,027
  1,096
  1,168
Earnings before tax, $m
  3,547
  4,232
  4,324
  4,429
  4,546
  4,676
  4,818
  4,973
  5,141
  5,321
  5,515
  5,819
  6,039
  6,274
  6,524
  6,789
  7,070
  7,367
  7,681
  8,013
  8,363
  8,733
  9,122
  9,533
  9,966
  10,422
  10,902
  11,407
  11,939
  12,498
  13,086
Tax expense, $m
  1,303
  1,143
  1,167
  1,196
  1,227
  1,262
  1,301
  1,343
  1,388
  1,437
  1,489
  1,571
  1,631
  1,694
  1,761
  1,833
  1,909
  1,989
  2,074
  2,163
  2,258
  2,358
  2,463
  2,574
  2,691
  2,814
  2,944
  3,080
  3,223
  3,374
  3,533
Net income, $m
  2,244
  3,090
  3,156
  3,233
  3,319
  3,413
  3,517
  3,630
  3,753
  3,884
  4,026
  4,248
  4,409
  4,580
  4,763
  4,956
  5,161
  5,378
  5,607
  5,849
  6,105
  6,375
  6,659
  6,959
  7,275
  7,608
  7,958
  8,327
  8,715
  9,124
  9,553

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  3,305
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  23,286
  20,385
  20,854
  21,390
  21,992
  22,658
  23,390
  24,186
  25,049
  25,978
  26,975
  28,041
  29,179
  30,391
  31,679
  33,045
  34,493
  36,026
  37,647
  39,360
  41,169
  43,077
  45,089
  47,211
  49,446
  51,800
  54,278
  56,887
  59,632
  62,520
  65,557
Adjusted assets (=assets-cash), $m
  19,981
  20,385
  20,854
  21,390
  21,992
  22,658
  23,390
  24,186
  25,049
  25,978
  26,975
  28,041
  29,179
  30,391
  31,679
  33,045
  34,493
  36,026
  37,647
  39,360
  41,169
  43,077
  45,089
  47,211
  49,446
  51,800
  54,278
  56,887
  59,632
  62,520
  65,557
Revenue / Adjusted assets
  1.022
  1.022
  1.022
  1.022
  1.022
  1.022
  1.022
  1.022
  1.022
  1.022
  1.022
  1.022
  1.022
  1.022
  1.022
  1.022
  1.022
  1.022
  1.022
  1.022
  1.022
  1.022
  1.022
  1.022
  1.022
  1.022
  1.022
  1.022
  1.022
  1.022
  1.022
Average production assets, $m
  16,768
  17,104
  17,498
  17,947
  18,452
  19,012
  19,625
  20,294
  21,017
  21,797
  22,633
  23,528
  24,483
  25,500
  26,580
  27,727
  28,942
  30,228
  31,588
  33,026
  34,543
  36,144
  37,833
  39,613
  41,488
  43,463
  45,543
  47,732
  50,035
  52,458
  55,007
Working capital, $m
  -2,346
  -2,083
  -2,131
  -2,186
  -2,248
  -2,316
  -2,390
  -2,472
  -2,560
  -2,655
  -2,757
  -2,866
  -2,982
  -3,106
  -3,238
  -3,377
  -3,525
  -3,682
  -3,848
  -4,023
  -4,207
  -4,402
  -4,608
  -4,825
  -5,053
  -5,294
  -5,547
  -5,814
  -6,094
  -6,390
  -6,700
Total debt, $m
  3,512
  3,242
  3,578
  3,961
  4,391
  4,868
  5,391
  5,960
  6,577
  7,241
  7,954
  8,716
  9,530
  10,396
  11,317
  12,294
  13,330
  14,426
  15,585
  16,810
  18,103
  19,467
  20,906
  22,423
  24,021
  25,704
  27,476
  29,341
  31,304
  33,369
  35,541
Total liabilities, $m
  14,845
  14,575
  14,911
  15,294
  15,724
  16,201
  16,724
  17,293
  17,910
  18,574
  19,287
  20,049
  20,863
  21,729
  22,650
  23,627
  24,663
  25,759
  26,918
  28,143
  29,436
  30,800
  32,239
  33,756
  35,354
  37,037
  38,809
  40,674
  42,637
  44,702
  46,874
Total equity, $m
  8,441
  5,810
  5,943
  6,096
  6,268
  6,458
  6,666
  6,893
  7,139
  7,404
  7,688
  7,992
  8,316
  8,661
  9,028
  9,418
  9,831
  10,267
  10,729
  11,218
  11,733
  12,277
  12,850
  13,455
  14,092
  14,763
  15,469
  16,213
  16,995
  17,818
  18,684
Total liabilities and equity, $m
  23,286
  20,385
  20,854
  21,390
  21,992
  22,659
  23,390
  24,186
  25,049
  25,978
  26,975
  28,041
  29,179
  30,390
  31,678
  33,045
  34,494
  36,026
  37,647
  39,361
  41,169
  43,077
  45,089
  47,211
  49,446
  51,800
  54,278
  56,887
  59,632
  62,520
  65,558
Debt-to-equity ratio
  0.416
  0.560
  0.600
  0.650
  0.700
  0.750
  0.810
  0.860
  0.920
  0.980
  1.030
  1.090
  1.150
  1.200
  1.250
  1.310
  1.360
  1.400
  1.450
  1.500
  1.540
  1.590
  1.630
  1.670
  1.700
  1.740
  1.780
  1.810
  1.840
  1.870
  1.900
Adjusted equity ratio
  0.257
  0.285
  0.285
  0.285
  0.285
  0.285
  0.285
  0.285
  0.285
  0.285
  0.285
  0.285
  0.285
  0.285
  0.285
  0.285
  0.285
  0.285
  0.285
  0.285
  0.285
  0.285
  0.285
  0.285
  0.285
  0.285
  0.285
  0.285
  0.285
  0.285
  0.285

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  2,244
  3,090
  3,156
  3,233
  3,319
  3,413
  3,517
  3,630
  3,753
  3,884
  4,026
  4,248
  4,409
  4,580
  4,763
  4,956
  5,161
  5,378
  5,607
  5,849
  6,105
  6,375
  6,659
  6,959
  7,275
  7,608
  7,958
  8,327
  8,715
  9,124
  9,553
Depreciation, amort., depletion, $m
  1,221
  1,277
  1,304
  1,335
  1,370
  1,408
  1,450
  1,497
  1,546
  1,600
  1,658
  1,623
  1,688
  1,759
  1,833
  1,912
  1,996
  2,085
  2,179
  2,278
  2,382
  2,493
  2,609
  2,732
  2,861
  2,997
  3,141
  3,292
  3,451
  3,618
  3,794
Funds from operations, $m
  4,310
  4,366
  4,460
  4,568
  4,688
  4,822
  4,968
  5,127
  5,299
  5,485
  5,684
  5,870
  6,097
  6,339
  6,596
  6,868
  7,157
  7,462
  7,785
  8,127
  8,487
  8,868
  9,269
  9,691
  10,137
  10,606
  11,099
  11,619
  12,166
  12,741
  13,347
Change in working capital, $m
  17
  -41
  -48
  -55
  -61
  -68
  -75
  -81
  -88
  -95
  -102
  -109
  -116
  -124
  -132
  -140
  -148
  -157
  -166
  -175
  -185
  -195
  -206
  -217
  -228
  -241
  -253
  -267
  -281
  -295
  -310
Cash from operations, $m
  4,293
  4,407
  4,508
  4,622
  4,750
  4,890
  5,043
  5,208
  5,387
  5,580
  5,785
  5,979
  6,214
  6,463
  6,727
  7,008
  7,305
  7,619
  7,951
  8,302
  8,672
  9,063
  9,474
  9,908
  10,365
  10,846
  11,353
  11,886
  12,447
  13,037
  13,657
Maintenance CAPEX, $m
  0
  -1,156
  -1,180
  -1,207
  -1,238
  -1,273
  -1,311
  -1,353
  -1,400
  -1,449
  -1,503
  -1,561
  -1,623
  -1,688
  -1,759
  -1,833
  -1,912
  -1,996
  -2,085
  -2,179
  -2,278
  -2,382
  -2,493
  -2,609
  -2,732
  -2,861
  -2,997
  -3,141
  -3,292
  -3,451
  -3,618
New CAPEX, $m
  -2,147
  -337
  -393
  -450
  -505
  -559
  -614
  -668
  -723
  -779
  -837
  -895
  -955
  -1,017
  -1,081
  -1,147
  -1,215
  -1,286
  -1,360
  -1,437
  -1,517
  -1,601
  -1,689
  -1,780
  -1,875
  -1,975
  -2,080
  -2,189
  -2,303
  -2,423
  -2,549
Cash from investing activities, $m
  -2,272
  -1,493
  -1,573
  -1,657
  -1,743
  -1,832
  -1,925
  -2,021
  -2,123
  -2,228
  -2,340
  -2,456
  -2,578
  -2,705
  -2,840
  -2,980
  -3,127
  -3,282
  -3,445
  -3,616
  -3,795
  -3,983
  -4,182
  -4,389
  -4,607
  -4,836
  -5,077
  -5,330
  -5,595
  -5,874
  -6,167
Free cash flow, $m
  2,021
  2,914
  2,935
  2,966
  3,007
  3,058
  3,118
  3,187
  3,264
  3,351
  3,446
  3,523
  3,636
  3,757
  3,888
  4,028
  4,178
  4,337
  4,506
  4,686
  4,877
  5,079
  5,293
  5,519
  5,758
  6,010
  6,276
  6,556
  6,851
  7,163
  7,490
Issuance/(repayment) of debt, $m
  -76
  296
  335
  383
  430
  477
  523
  570
  617
  664
  713
  763
  814
  866
  921
  977
  1,035
  1,096
  1,159
  1,225
  1,293
  1,364
  1,439
  1,517
  1,598
  1,683
  1,772
  1,865
  1,963
  2,065
  2,172
Issuance/(repurchase) of shares, $m
  -1,721
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  -1,702
  296
  335
  383
  430
  477
  523
  570
  617
  664
  713
  763
  814
  866
  921
  977
  1,035
  1,096
  1,159
  1,225
  1,293
  1,364
  1,439
  1,517
  1,598
  1,683
  1,772
  1,865
  1,963
  2,065
  2,172
Total cash flow (excl. dividends), $m
  319
  3,210
  3,270
  3,349
  3,437
  3,534
  3,641
  3,756
  3,881
  4,015
  4,159
  4,286
  4,450
  4,624
  4,809
  5,005
  5,213
  5,433
  5,665
  5,911
  6,170
  6,444
  6,732
  7,036
  7,356
  7,693
  8,048
  8,421
  8,814
  9,228
  9,662
Retained Cash Flow (-), $m
  -1,083
  -108
  -134
  -153
  -171
  -190
  -208
  -227
  -246
  -265
  -284
  -304
  -324
  -345
  -367
  -389
  -413
  -437
  -462
  -488
  -515
  -544
  -574
  -605
  -637
  -671
  -706
  -743
  -782
  -823
  -866
Prev. year cash balance distribution, $m
 
  2,739
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  5,841
  3,137
  3,196
  3,266
  3,344
  3,432
  3,529
  3,635
  3,750
  3,874
  3,982
  4,125
  4,279
  4,442
  4,616
  4,800
  4,996
  5,203
  5,423
  5,655
  5,900
  6,158
  6,431
  6,719
  7,022
  7,341
  7,678
  8,032
  8,404
  8,797
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  5,601
  2,871
  2,782
  2,689
  2,592
  2,491
  2,384
  2,272
  2,154
  2,031
  1,891
  1,760
  1,627
  1,491
  1,355
  1,220
  1,087
  958
  835
  719
  610
  511
  422
  342
  273
  214
  165
  124
  92
  66
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Southwest Airlines Co. operates a passenger airline that provides scheduled air transportation services in the United States and near-international markets. As of December 31, 2016, the company operated a total of 723 Boeing 737 aircraft; and served 101 destinations in 40 states, the District of Columbia, and the Commonwealth of Puerto Rico, as well as 8 near-international countries, including Mexico, Jamaica, The Bahamas, Aruba, the Dominican Republic, Costa Rica, Belize, and Cuba. It also sells frequent flyer points and related services to business partners participating in the Rapid Rewards frequent flyer program, such as car rental agencies, hotels, restaurants, and retailers. In addition, the company operates Southwest.com, an Internet Website that enables customers to purchase and manage travel online; and Swabiz.com, a business travel reservation Web page. Southwest Airlines Co. was founded in 1967 and is headquartered in Dallas, Texas.

FINANCIAL RATIOS  of  Southwest Airlines (LUV)

Valuation Ratios
P/E Ratio 16
Price to Sales 1.8
Price to Book 4.2
Price to Tangible Book
Price to Cash Flow 8.3
Price to Free Cash Flow 16.7
Growth Rates
Sales Growth Rate 3.1%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 0.2%
Cap. Spend. - 3 Yr. Gr. Rate 8.2%
Financial Strength
Quick Ratio 6
Current Ratio 0
LT Debt to Equity 34.9%
Total Debt to Equity 41.6%
Interest Coverage 36
Management Effectiveness
Return On Assets 10.3%
Ret/ On Assets - 3 Yr. Avg. 9.2%
Return On Total Capital 19.8%
Ret/ On T. Cap. - 3 Yr. Avg. 17.5%
Return On Equity 28.4%
Return On Equity - 3 Yr. Avg. 25.1%
Asset Turnover 0.9
Profitability Ratios
Gross Margin 75.1%
Gross Margin - 3 Yr. Avg. 71.3%
EBITDA Margin 23.8%
EBITDA Margin - 3 Yr. Avg. 20.8%
Operating Margin 18.4%
Oper. Margin - 3 Yr. Avg. 17%
Pre-Tax Margin 17.4%
Pre-Tax Margin - 3 Yr. Avg. 14.9%
Net Profit Margin 11%
Net Profit Margin - 3 Yr. Avg. 9.4%
Effective Tax Rate 36.7%
Eff/ Tax Rate - 3 Yr. Avg. 37.2%
Payout Ratio 9.9%

LUV stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the LUV stock intrinsic value calculation we used $20425 million for the last fiscal year's total revenue generated by Southwest Airlines. The default revenue input number comes from 2016 income statement of Southwest Airlines. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our LUV stock valuation model: a) initial revenue growth rate of 2% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for LUV is calculated based on our internal credit rating of Southwest Airlines, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Southwest Airlines.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of LUV stock the variable cost ratio is equal to 79.2%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for LUV stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for Southwest Airlines.

Corporate tax rate of 27% is the nominal tax rate for Southwest Airlines. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the LUV stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for LUV are equal to 82.1%.

Life of production assets of 14.5 years is the average useful life of capital assets used in Southwest Airlines operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for LUV is equal to -10%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $8441 million for Southwest Airlines - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 608.696 million for Southwest Airlines is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Southwest Airlines at the current share price and the inputted number of shares is $33.7 billion.

RELATED COMPANIES Price Int.Val. Rating
JBLU JetBlue Airway 21.81 37.01  str.buy
SAVE Spirit Airline 38.28 131.70  str.buy
ALGT Allegiant Trav 123.40 332.81  str.buy
AAL American Airli 48.41 74.99  buy
DAL Delta Air Line 50.13 125.82  str.buy
UAL United Contine 66.92 214.43  str.buy
ALK Alaska Air Gro 83.81 613.50  str.buy
SKYW Skywest 36.35 19.24  sell
HA Hawaiian Holdi 42.90 156.16  str.buy

COMPANY NEWS

▶ U.S. airlines are still making money, just not as much as last year   [02:55PM  American City Business Journals]
▶ Why EXPDs Airfreight Segments Revenues Climbed in 2Q17   [Aug-15-17 04:05PM  Market Realist]
▶ American Airlines, Southwest post employment gains   [04:00PM  American City Business Journals]
▶ Southwest Airlines' frustrated mechanics bring in some heavy artillery   [03:15PM  American City Business Journals]
▶ Berkshire Hathaway sells off GE stake, boosts BNY Mellon   [Aug-14-17 06:25PM  Associated Press]
▶ Feel the LUV: How Southwest was determined to be the nations most trusted airline   [Aug-10-17 04:56PM  American City Business Journals]
▶ Traffic up for American Airlines, Southwest, but load factors differ   [02:20PM  American City Business Journals]
▶ Southwest Airlines Reports July Traffic   [06:30AM  PR Newswire]
▶ Why Southwest Airlines Dropped 11% in July   [Aug-07-17 01:08PM  Motley Fool]
▶ How to score the most comfortable airline seat   [Aug-04-17 05:01PM  MarketWatch]
▶ Southwest Airlines Stays at the Head of the Pack   [Jul-31-17 09:05PM  Motley Fool]
▶ Tampa International getting new, seasonal nonstop flight to Omaha   [11:55AM  American City Business Journals]
▶ Airlines See Weaker Q3 As Competition Mounts On Fares   [Jul-28-17 04:03PM  Investor's Business Daily]
▶ See the latest concessions to open at Tampa International Airport   [02:31PM  American City Business Journals]
▶ Southwest beats Street 2Q forecasts   [Jul-27-17 11:05PM  Associated Press]
▶ Bulls fly in the airlines   [01:53PM  CNBC Videos]
▶ [$$] Southwest Sees Slower Growth Than Other Airlines   [07:49AM  The Wall Street Journal]
▶ Southwest Reports Second Quarter Profit   [06:30AM  PR Newswire]
▶ Why Southwest Airlines has the 'brand intimacy' major competitors lack   [Jul-26-17 04:10PM  American City Business Journals]
▶ Fear the Starbucks Mosh Pit   [03:14PM  TheStreet.com]
▶ Airlines facing crisis that could 'put some airlines out of business'   [01:20PM  American City Business Journals]
▶ Airlines facing crisis that could 'put some airlines out of business'   [11:10AM  American City Business Journals]
▶ What Analysts Are Recommending for Southwest Airlines   [Jul-25-17 09:07AM  Market Realist]
▶ Ride the Momentum Wave with These 4 Stocks   [Jul-24-17 10:44AM  Zacks]
Stock chart of LUV Financial statements of LUV
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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