Intrinsic value of Southwest Airlines - LUV

Previous Close

$58.88

  Intrinsic Value

$90.39

stock screener

  Rating & Target

str. buy

+54%

  Value-price divergence*

+57%

Previous close

$58.88

 
Intrinsic value

$90.39

 
Up/down potential

+54%

 
Rating

str. buy

 
Value-price divergence*

+57%

*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 36.6

 

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
  6.70
  6.53
  6.38
  6.24
  6.12
  6.00
  5.90
  5.81
  5.73
  5.66
  5.59
  5.53
  5.48
  5.43
  5.39
  5.35
  5.32
  5.28
  5.26
  5.23
  5.21
  5.19
  5.17
  5.15
  5.14
  5.12
  5.11
  5.10
  5.09
  5.08
Revenue, $m
  20,425
  21,793
  23,217
  24,697
  26,238
  27,843
  29,514
  31,257
  33,074
  34,969
  36,948
  39,014
  41,173
  43,430
  45,789
  48,256
  50,838
  53,540
  56,369
  59,331
  62,434
  65,685
  69,091
  72,661
  76,404
  80,328
  84,442
  88,757
  93,283
  98,030
  103,010
Variable operating expenses, $m
 
  17,254
  18,374
  19,540
  20,753
  22,016
  23,332
  24,704
  26,134
  27,627
  29,184
  30,714
  32,414
  34,190
  36,047
  37,990
  40,022
  42,149
  44,376
  46,709
  49,151
  51,710
  54,392
  57,203
  60,149
  63,238
  66,477
  69,874
  73,437
  77,174
  81,094
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
  17,254
  18,374
  19,540
  20,753
  22,016
  23,332
  24,704
  26,134
  27,627
  29,184
  30,714
  32,414
  34,190
  36,047
  37,990
  40,022
  42,149
  44,376
  46,709
  49,151
  51,710
  54,392
  57,203
  60,149
  63,238
  66,477
  69,874
  73,437
  77,174
  81,094
Operating income, $m
  3,760
  4,540
  4,842
  5,157
  5,485
  5,826
  6,182
  6,553
  6,939
  7,343
  7,764
  8,300
  8,760
  9,240
  9,742
  10,266
  10,816
  11,391
  11,992
  12,623
  13,283
  13,974
  14,699
  15,459
  16,255
  17,090
  17,965
  18,883
  19,846
  20,856
  21,915
EBITDA, $m
  4,981
  5,871
  6,254
  6,653
  7,068
  7,500
  7,950
  8,420
  8,909
  9,420
  9,953
  10,509
  11,091
  11,699
  12,334
  12,999
  13,694
  14,422
  15,184
  15,982
  16,818
  17,693
  18,611
  19,573
  20,581
  21,638
  22,746
  23,908
  25,127
  26,406
  27,748
Interest expense (income), $m
  100
  103
  137
  172
  208
  246
  285
  326
  369
  413
  460
  508
  559
  612
  667
  725
  785
  848
  914
  984
  1,056
  1,132
  1,212
  1,295
  1,383
  1,474
  1,570
  1,671
  1,777
  1,887
  2,004
Earnings before tax, $m
  3,547
  4,436
  4,705
  4,985
  5,277
  5,581
  5,897
  6,227
  6,571
  6,929
  7,304
  7,792
  8,201
  8,628
  9,075
  9,542
  10,031
  10,542
  11,078
  11,639
  12,227
  12,842
  13,487
  14,164
  14,872
  15,615
  16,395
  17,212
  18,069
  18,968
  19,911
Tax expense, $m
  1,303
  1,198
  1,270
  1,346
  1,425
  1,507
  1,592
  1,681
  1,774
  1,871
  1,972
  2,104
  2,214
  2,330
  2,450
  2,576
  2,708
  2,846
  2,991
  3,143
  3,301
  3,467
  3,642
  3,824
  4,016
  4,216
  4,427
  4,647
  4,879
  5,121
  5,376
Net income, $m
  2,244
  3,239
  3,435
  3,639
  3,852
  4,074
  4,305
  4,546
  4,797
  5,059
  5,332
  5,688
  5,987
  6,299
  6,625
  6,966
  7,322
  7,696
  8,087
  8,496
  8,925
  9,375
  9,846
  10,339
  10,857
  11,399
  11,968
  12,565
  13,190
  13,847
  14,535

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
  21,324
  22,717
  24,165
  25,673
  27,243
  28,879
  30,584
  32,362
  34,216
  36,153
  38,175
  40,287
  42,495
  44,803
  47,218
  49,744
  52,388
  55,155
  58,054
  61,090
  64,271
  67,604
  71,097
  74,759
  78,599
  82,624
  86,846
  91,275
  95,919
  100,792
Adjusted assets (=assets-cash), $m
  19,981
  21,324
  22,717
  24,165
  25,673
  27,243
  28,879
  30,584
  32,362
  34,216
  36,153
  38,175
  40,287
  42,495
  44,803
  47,218
  49,744
  52,388
  55,155
  58,054
  61,090
  64,271
  67,604
  71,097
  74,759
  78,599
  82,624
  86,846
  91,275
  95,919
  100,792
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
  17,892
  19,061
  20,276
  21,541
  22,859
  24,231
  25,662
  27,153
  28,710
  30,334
  32,031
  33,803
  35,656
  37,593
  39,618
  41,738
  43,956
  46,279
  48,711
  51,258
  53,927
  56,724
  59,655
  62,728
  65,949
  69,327
  72,869
  76,585
  80,482
  84,571
Working capital, $m
  -2,346
  -5,427
  -5,781
  -6,150
  -6,533
  -6,933
  -7,349
  -7,783
  -8,235
  -8,707
  -9,200
  -9,715
  -10,252
  -10,814
  -11,401
  -12,016
  -12,659
  -13,331
  -14,036
  -14,773
  -15,546
  -16,355
  -17,204
  -18,093
  -19,025
  -20,002
  -21,026
  -22,100
  -23,227
  -24,409
  -25,649
Total debt, $m
  3,512
  3,914
  4,910
  5,945
  7,023
  8,146
  9,315
  10,534
  11,806
  13,132
  14,516
  15,962
  17,472
  19,051
  20,701
  22,428
  24,234
  26,124
  28,103
  30,176
  32,346
  34,621
  37,004
  39,501
  42,120
  44,865
  47,743
  50,762
  53,928
  57,249
  60,733
Total liabilities, $m
  14,845
  15,247
  16,243
  17,278
  18,356
  19,479
  20,648
  21,867
  23,139
  24,465
  25,849
  27,295
  28,805
  30,384
  32,034
  33,761
  35,567
  37,457
  39,436
  41,509
  43,679
  45,954
  48,337
  50,834
  53,453
  56,198
  59,076
  62,095
  65,261
  68,582
  72,066
Total equity, $m
  8,441
  6,077
  6,474
  6,887
  7,317
  7,764
  8,230
  8,716
  9,223
  9,752
  10,304
  10,880
  11,482
  12,111
  12,769
  13,457
  14,177
  14,930
  15,719
  16,545
  17,411
  18,317
  19,267
  20,263
  21,306
  22,401
  23,548
  24,751
  26,013
  27,337
  28,726
Total liabilities and equity, $m
  23,286
  21,324
  22,717
  24,165
  25,673
  27,243
  28,878
  30,583
  32,362
  34,217
  36,153
  38,175
  40,287
  42,495
  44,803
  47,218
  49,744
  52,387
  55,155
  58,054
  61,090
  64,271
  67,604
  71,097
  74,759
  78,599
  82,624
  86,846
  91,274
  95,919
  100,792
Debt-to-equity ratio
  0.416
  0.640
  0.760
  0.860
  0.960
  1.050
  1.130
  1.210
  1.280
  1.350
  1.410
  1.470
  1.520
  1.570
  1.620
  1.670
  1.710
  1.750
  1.790
  1.820
  1.860
  1.890
  1.920
  1.950
  1.980
  2.000
  2.030
  2.050
  2.070
  2.090
  2.110
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
  3,239
  3,435
  3,639
  3,852
  4,074
  4,305
  4,546
  4,797
  5,059
  5,332
  5,688
  5,987
  6,299
  6,625
  6,966
  7,322
  7,696
  8,087
  8,496
  8,925
  9,375
  9,846
  10,339
  10,857
  11,399
  11,968
  12,565
  13,190
  13,847
  14,535
Depreciation, amort., depletion, $m
  1,221
  1,331
  1,412
  1,495
  1,583
  1,673
  1,768
  1,867
  1,970
  2,077
  2,189
  2,209
  2,331
  2,459
  2,593
  2,732
  2,878
  3,031
  3,192
  3,359
  3,535
  3,719
  3,912
  4,114
  4,326
  4,548
  4,781
  5,025
  5,282
  5,551
  5,832
Funds from operations, $m
  4,310
  4,570
  4,846
  5,135
  5,435
  5,747
  6,073
  6,412
  6,766
  7,136
  7,521
  7,897
  8,318
  8,758
  9,217
  9,698
  10,201
  10,727
  11,279
  11,856
  12,460
  13,094
  13,758
  14,453
  15,183
  15,947
  16,749
  17,590
  18,472
  19,397
  20,368
Change in working capital, $m
  17
  -341
  -354
  -369
  -384
  -400
  -416
  -434
  -452
  -472
  -493
  -515
  -538
  -562
  -587
  -614
  -643
  -673
  -704
  -738
  -773
  -809
  -848
  -889
  -932
  -977
  -1,024
  -1,074
  -1,127
  -1,182
  -1,240
Cash from operations, $m
  4,293
  4,910
  5,201
  5,503
  5,819
  6,147
  6,489
  6,846
  7,219
  7,608
  8,014
  8,412
  8,855
  9,319
  9,805
  10,312
  10,844
  11,400
  11,983
  12,593
  13,233
  13,903
  14,606
  15,342
  16,115
  16,925
  17,774
  18,665
  19,599
  20,579
  21,608
Maintenance CAPEX, $m
  0
  -1,156
  -1,234
  -1,315
  -1,398
  -1,486
  -1,576
  -1,671
  -1,770
  -1,873
  -1,980
  -2,092
  -2,209
  -2,331
  -2,459
  -2,593
  -2,732
  -2,878
  -3,031
  -3,192
  -3,359
  -3,535
  -3,719
  -3,912
  -4,114
  -4,326
  -4,548
  -4,781
  -5,025
  -5,282
  -5,551
New CAPEX, $m
  -2,147
  -1,125
  -1,168
  -1,216
  -1,265
  -1,317
  -1,372
  -1,430
  -1,492
  -1,556
  -1,625
  -1,697
  -1,772
  -1,852
  -1,937
  -2,026
  -2,120
  -2,218
  -2,322
  -2,432
  -2,547
  -2,669
  -2,797
  -2,931
  -3,073
  -3,221
  -3,378
  -3,542
  -3,716
  -3,897
  -4,089
Cash from investing activities, $m
  -2,272
  -2,281
  -2,402
  -2,531
  -2,663
  -2,803
  -2,948
  -3,101
  -3,262
  -3,429
  -3,605
  -3,789
  -3,981
  -4,183
  -4,396
  -4,619
  -4,852
  -5,096
  -5,353
  -5,624
  -5,906
  -6,204
  -6,516
  -6,843
  -7,187
  -7,547
  -7,926
  -8,323
  -8,741
  -9,179
  -9,640
Free cash flow, $m
  2,021
  2,629
  2,798
  2,973
  3,155
  3,344
  3,540
  3,745
  3,957
  4,179
  4,409
  4,623
  4,874
  5,136
  5,409
  5,694
  5,992
  6,303
  6,629
  6,970
  7,326
  7,699
  8,090
  8,499
  8,928
  9,377
  9,848
  10,341
  10,858
  11,400
  11,969
Issuance/(repayment) of debt, $m
  -76
  968
  996
  1,036
  1,078
  1,123
  1,169
  1,219
  1,271
  1,326
  1,384
  1,446
  1,510
  1,579
  1,650
  1,726
  1,806
  1,890
  1,979
  2,072
  2,171
  2,274
  2,383
  2,498
  2,618
  2,745
  2,878
  3,019
  3,166
  3,321
  3,484
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
  968
  996
  1,036
  1,078
  1,123
  1,169
  1,219
  1,271
  1,326
  1,384
  1,446
  1,510
  1,579
  1,650
  1,726
  1,806
  1,890
  1,979
  2,072
  2,171
  2,274
  2,383
  2,498
  2,618
  2,745
  2,878
  3,019
  3,166
  3,321
  3,484
Total cash flow (excl. dividends), $m
  319
  3,597
  3,794
  4,009
  4,233
  4,466
  4,710
  4,964
  5,228
  5,505
  5,794
  6,069
  6,384
  6,714
  7,059
  7,420
  7,798
  8,194
  8,608
  9,042
  9,497
  9,974
  10,473
  10,997
  11,546
  12,122
  12,726
  13,360
  14,024
  14,721
  15,453
Retained Cash Flow (-), $m
  -1,083
  -375
  -397
  -413
  -430
  -447
  -466
  -486
  -507
  -529
  -552
  -576
  -602
  -629
  -658
  -688
  -720
  -754
  -789
  -826
  -865
  -907
  -950
  -996
  -1,044
  -1,094
  -1,147
  -1,203
  -1,262
  -1,324
  -1,389
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
 
  5,960
  3,397
  3,596
  3,803
  4,019
  4,244
  4,478
  4,722
  4,976
  5,242
  5,493
  5,782
  6,085
  6,401
  6,732
  7,078
  7,440
  7,819
  8,216
  8,632
  9,067
  9,523
  10,001
  10,503
  11,028
  11,579
  12,156
  12,762
  13,398
  14,064
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
 
  5,715
  3,110
  3,130
  3,132
  3,115
  3,080
  3,025
  2,951
  2,859
  2,748
  2,608
  2,468
  2,314
  2,149
  1,976
  1,799
  1,619
  1,440
  1,265
  1,097
  938
  790
  656
  535
  429
  338
  261
  197
  146
  106
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. (Southwest) operates Southwest Airlines, a passenger airline that provides scheduled air transportation in the United States and near-international markets. The Company provides point-to-point service. The Company offers ancillary service offerings, such as Southwest's EarlyBird Check-In and transportation of pets and unaccompanied minors, in accordance with Southwest's respective policies. Southwest's Rapid Rewards frequent flyer program enables program members (Members) to earn points for every dollar spent on Southwest fares. Its Internet Website, Southwest.com, is an avenue for Southwest customers to purchase and manage travel online. As of December 31, 2016, Southwest operated a total of 723 Boeing 737 aircraft and served 101 destinations in 40 states, the District of Columbia, the Commonwealth of Puerto Rico, and eight near-international countries: Mexico, Jamaica, The Bahamas, Aruba, Dominican Republic, Costa Rica, Belize, and Cuba.

FINANCIAL RATIOS  of  Southwest Airlines (LUV)

Valuation Ratios
P/E Ratio 17
Price to Sales 1.9
Price to Book 4.5
Price to Tangible Book
Price to Cash Flow 8.9
Price to Free Cash Flow 17.8
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 6.7% 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 -24.9%. 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 621.868 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 $36.6 billion.

RELATED COMPANIES Price Int.Val. Rating
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ALGT Allegiant Trav 139.90 355.03  str.buy
AAL American Airli 52.27 50.07  hold
DAL Delta Air Line 53.62 159.50  str.buy
UAL United Contine 66.95 405.36  str.buy
ALK Alaska Air Gro 80.47 1,260.67  str.buy
SKYW Skywest 45.70 17.67  sell
HA Hawaiian Holdi 38.95 175.44  str.buy

COMPANY NEWS

▶ It's Official: Southwest Airlines Is Coming to Hawaii   [Oct-15-17 08:10AM  Motley Fool]
▶ Effort to recall Southwest Airlines union leader falters   [02:05PM  American City Business Journals]
▶ Viacom and AT&T fall while Southwest Airlines rises   [Oct-12-17 04:41PM  Associated Press]
▶ Say Aloha To Another Airfare Price War   [04:21PM  Investor's Business Daily]
▶ [$$] Southwest Airlines to Launch Hawaii Service   [09:58AM  The Wall Street Journal]
▶ Southwest Is Finally Going to Start Flying to Hawaii   [Oct-11-17 11:16PM  Bloomberg]
▶ Southwest Airlines fares fall below $100 roundtrip on dozens of routes   [Oct-10-17 04:20PM  American City Business Journals]
▶ Bulls bet on this under-pressure name   [01:30PM  CNBC Videos]
▶ Southwest Airlines traffic down, expected to get worse   [05:35PM  American City Business Journals]
▶ Airline Industry Outlook - October 2017   [Oct-05-17 02:49PM  Zacks]
▶ Southwest wants to tell you a story   [10:15AM  American City Business Journals]
▶ Delta Air Lines far outpaces competitors in Sept. on-time arrival derby   [02:45PM  American City Business Journals]
▶ Airlines offer free travel for Las Vegas victims' families   [Oct-03-17 06:44PM  Associated Press]
▶ Bulls fly with these airline stocks   [01:21PM  CNBC Videos]
▶ These 3 Stocks Are Up 500% in Just 5 Years   [Oct-02-17 09:01PM  Motley Fool]
▶ Southwest Airlines Begins Boeing 737 MAX 8 Service   [Oct-01-17 01:48PM  PR Newswire]
▶ Flights between Tampa International and Puerto Rico to resume   [Sep-29-17 04:45PM  American City Business Journals]
▶ Delta to increase flights to/from Puerto Rico   [02:52PM  American City Business Journals]
▶ LIVE BLOG: Closing Bell Edition   [03:18PM  TheStreet.com]
▶ Police drag woman off Southwest Airlines flight   [Sep-27-17 05:59PM  Associated Press]
▶ United Airlines applies for more Houston-Havana flights, bucking industry trend   [Sep-26-17 11:15PM  American City Business Journals]
▶ Hows Southwest doing at CVG?   [05:55AM  American City Business Journals]
▶ LUV launches ad campaign that plucks at the heart strings   [Sep-25-17 02:00PM  American City Business Journals]
▶ Study ranks O'Hare as tops in airline connections   [12:50PM  American City Business Journals]
▶ Airline baggage fees are out of control how to save   [Sep-22-17 03:16PM  Yahoo Finance]
▶ Where Tampa International Airport ranks in the latest J.D. Power study   [Sep-21-17 03:15PM  American City Business Journals]
▶ The Better Buy in Airlines   [10:27AM  Motley Fool]
▶ Cue the luau dancers: Southwest gearing up for flights to Hawaii?   [Sep-20-17 12:10PM  American City Business Journals]
▶ American Airlines: Is It a $75 Stock?   [11:36AM  Barrons.com]
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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