Does Southwest Airlines Company (LUV) Make A Suitable Value Pick Now?

Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?

One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put Southwest Airlines Company (NYSE:LUV) stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:

PE Ratio

A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.

On this front, Southwest Airlines has a trailing twelve months PE ratio of 15.38, as you can see in the chart below:

This level actually compares pretty favorably with the market at large, as the PE for the S&P 500 stands at about 19.85. If we focus on the long-term PE trend, Southwest Airlines’s current PE level puts it below its midpoint over the past five years.

Further, the stock’s PE also compares favorably with the sector’s trailing twelve months PE ratio, which stands at 15.89. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.

We should also point out that Southwest Airlines has a forward PE ratio (price relative to this year’s earnings) of just 14.13, so it is fair to say that a slightly more value-oriented path may be ahead for Southwest Airlines stock in the near term too.

P/S Ratio

Another key metric to note is the Price/Sales ratio. This approach compares a given stock’s price to its total sales, where a lower reading is generally considered better. Some people like this metric more than other value-focused ones because it looks at sales, something that is far harder to manipulate with accounting tricks than earnings.

Right now, Southwest Airlines has a P/S ratio of about 1.57. This is lower than the S&P 500 average, which comes in at 3.13 right now. Also, as we can see in the chart below, this is well below the highs for this stock in particular over the past few years, , suggesting some level of undervalued trading—at least compared to historical norms.

Broad Value Outlook

In aggregate, Southwest Airlines currently has a Zacks Value Style Score of A, putting it into the top 20% of all stocks we cover from this look. This makes Southwest Airlines a solid choice for value investors.

What About the Stock Overall?

Though Southwest Airlines might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth grade of B and a Momentum score of C. This gives LUV a Zacks VGM score—or its overarching fundamental grade—of A. (You can read more about the Zacks Style Scores here >>)

Meanwhile, the company’s recent earnings estimates have been discouraging. The current quarter has seen one estimate going higher in the past sixty days compared to five lower, while the full year estimate has seen three upward and three downward movements in the same time period.

This has had a significant impact on the consensus estimate as the current quarter consensus estimate has fallen by 6.4% in the past two months, while the full year estimate has inched lower by 0.3%. You can see the consensus estimate trend and recent price action for the stock in the chart below:

Southwest Airlines Company Price and Consensus

Southwest Airlines Company Price and Consensus | Southwest Airlines Company Quote

This unfavorable trend is why the stock has just a Zacks Rank #3 (Hold) and why we are looking for in-line performance from the company in the near term.

Bottom Line

Southwest Airlines is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. Moreover, a strong industry rank (Top 13%) bolsters its growth potential. In fact, over the past one year, the industry has clearly outperformed the broader market, as you can see below:

So, value investors might want to wait for estimates and analyst sentiment to turn around in this name first, but once that happens, this stock could be a compelling pick.

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