Southwest Airlines Company (LUV)

Conclusion

Southwest Airlines Company operates scheduled passenger flights in the United States and to nearby countries. At December 31, 2025 it flew 803 Boeing 737 aircraft to 117 destinations. At a price of 46.30 USD on 2026-11-09, the market capitalisation is 22.7 billion USD and the enterprise value is 25.9 billion USD.

The verdict is fair. The fair value band runs from 43.02 to 64.53 USD with a midpoint of 53.78 USD, and the margin of safety is 16.2% at the current price. Against their own ten-year medians, the price-to-earnings ratio of 21.5 carries a premium of -22.6% (median 27.8), the enterprise value to EBITDA of 8.5 a premium of 10.0% (median 7.8), and the price-to-sales ratio of 0.72 a premium of -49.6% (median 1.43). The fair value from historical multiples is 53.78 USD. A discounted cash flow value and a reverse DCF are not available, because free cash flow is negative, so the growth implied by the price cannot be set against delivered growth. Delivered growth is 5.6% revenue CAGR over three years and -2.0% EPS CAGR over three years.

The strongest supports are net debt to EBITDA of 1.07, a Piotroski score of 7 out of 9 and a five-year share count CAGR of -0.25%. The weakest numbers are a current ratio of 0.47, an operating margin of 4.4% against a ten-year median of 7.6%, and free cash flow conversion of -68.9% over the last twelve months.

Financial health

Financial health is yellow: net debt to EBITDA of 1.07 and interest coverage of 7.1 support it, while a current ratio of 0.47 and a quick ratio of 0.36 pull it down. Debt to equity stands at 0.94. The five-year debt versus revenue growth measure reads -38.7%. The Altman Z-score is 2.27, in the grey zone. The Altman model was designed for manufacturers, and an airline is not one, so this reading is only indicative. Insolvency risk: low, about 2.3% by the estimate of the Ohlson model over one to two years.

Earnings quality

Earnings quality is yellow. A Piotroski score of 7 out of 9, a Beneish M-score of -2.66 (unlikely manipulation) and six beats in the last eight quarters support it. Free cash flow conversion of -68.9% over the last twelve months and -39.8% over five years pulls it down, and free cash flow after stock-based compensation is -725 million USD. The accruals ratio is -4.5%. Stock-based compensation to revenue is not available. The five-year share count CAGR of -0.25% points to buybacks. Estimates have fallen: the current year's estimate is down 19.0% over 90 days, with 18 downward and 3 upward revisions in the last 30 days, and the next year's estimate is down 15.4%, with 17 downward and 2 upward revisions.

Profitability

Profitability is red. The operating margin of 4.4% is assessed bad against a ten-year median of 7.6%. The gross margin of 55.7% sits against a median of 23.0%, and the net margin of 3.3% against 4.2%. ROIC of 10.9% against WACC of 9.3% gives an ROIC minus WACC of 1.5%, labelled neutral. The five-year ROIC median is 8.3%. ROE of 14.4% is inflated by leverage: the DuPont split shows a net margin of 1.6%, an asset turnover of 0.97 and an equity multiplier of 3.64 at the end of 2025. Most of the return on equity therefore comes from borrowed capital.

Growth

Growth is yellow. Revenue CAGR of 25.4% over five years, and growth in 9 of 10 comparable years, support it, as does next year's EPS estimate growth of 51.5%. Pulling it down are EPS CAGRs of -2.0% over three years and -13.2% over ten years. Revenue CAGR is 5.6% over three years and 3.5% over ten years. The five-year revenue figure is well above the other two, so the recent path has been uneven, and earnings have not followed revenue.

Valuation

Valuation is yellow. The verdict is fair, with a margin of safety of 16.2%. The price-to-earnings ratio is 21.5 against a median of 27.8, a premium of -22.6%. The price-to-book ratio is 3.09 against 3.19, a premium of -3.0%. The dividend yield is 3.3% and the forward yield 1.6%. The payout on free cash flow is not available because free cash flow is negative. The discounted cash flow value is not available; the discount rate used is 10.99%. The fair value band is an order-of-magnitude estimate built on fixed assumptions (a 5% equity risk premium and capped growth), not a price target.

Risks

The current ratio of 0.47 and quick ratio of 0.36 mean short-term obligations are large relative to liquid assets, so the company depends on continued access to funding. Negative free cash flow of -725 million USD after stock-based compensation means operations are not currently funding the business, a pressure that would grow if conditions worsened. Falling estimates for both the current and the next year add further doubt. Values not available: the discounted cash flow value, the reverse DCF, stock-based compensation to revenue and the payout on free cash flow. The analysis has limits: it contains no debt maturity schedule and no revenue by segment, and the Altman and Ohlson models are only indicative for an airline.