Southwest Story a Sad One?
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In a previous post, I wrote about the fact that everything and everyone, including corporations, have a story. I then went on to say that stories are typically multifaceted, and every story has a number of contributing smaller stories, which come together to tell that greater tale.
And, as a geeky accountant, I find it exciting that ingrained within every company’s greater story is its financial statements. My goal here, though, is only to highlight pieces of a company’s financial story. In order to draw a more informed investment decision about the discussed companies, don’t neglect to read up on the other narratives that make up their greater stories. Only then can you know if their stories are good and worthy of your investment bookshelf.
In this post, I want to highlight a few plots within the financial narratives of Southwest Airlines (NYSE: LUV), two of its competitors, JetBlue Airways (NASDAQ: JBLU) and Alaska Air Group (NYSE: ALK), and the Regional Airlines industry in general.
|
|
LUV |
JBLU |
ALK |
INDUSTRY |
|
Rev. Growth (5 Yr. Avg.)* |
10.57% |
10.85% |
4.77% |
6.84% |
|
Gross Margin (5 Yr. Avg.)* |
41.50% |
39.70% |
44.30% |
41.10% |
|
Debt to Equity (MRQ)* |
0.48 |
1.57 |
0.89 |
1.14 |
|
Return on Equity (TTM)* |
4.90% |
7.60% |
19.50% |
N/A |
|
Price/Earnings (TTM)* |
20.30 |
11.90 |
10.60 |
17.10 |
|
Price/Free Cash Flow (TTM)* |
22.90 |
2.30 |
6.70 |
27.50 |
*Data obtained from fool.com
The Southwest Story
As you can see from the above chart, the Southwest story (or at least the financial performance chapter) appears to be a mixed one. Southwest managed to achieve a decent five-year average revenue growth of 10.57%, which is better than that of Alaska and the industry and close to that of JetBlue. However, Southwest managed to do so with an okay five-year average gross margin of only 41.50% (which is barely above the industry average of 41.10% but still on par with its competitors). On a different note, Southwest is in great financial condition with a debt to equity ratio of only 0.48, which is the lowest of all the companies listed above.
The worst part of the Southwest story is its return on equity. It has generated a dismal trailing twelve-month return on equity of only 4.90%, which is lower than both JetBlue’s and Alaska’s returns. Given Southwest’s somewhat disappointing performance in these areas, I’m baffled with how expensive the stock is at a P/E ratio of 20.30, which is not only nearly twice that of JetBlue and Alaska, but it’s also greater than the industry average. Is this indicative of an overvalued stock?
The P/FCF ratio, which gives us a clearer picture of Southwest’s value, is just as alarming at 22.90. That’s more than three times the P/FCF of Alaska, yet Alaska has generated nearly four times the ROE of Southwest. Am I missing something?
A Sad Story
I’m no literary critic, but based on this quick analysis of the Southwest financial story, I’d say the narrative needs a bit of tweaking. As I said previously though, the financial stories of a company are only one among many that makes up their greater story. The remaining stories within the Southwest narrative may very well shed additional light on its financial story, making it worth a buy; but I’ll hold off on adding it to my investment bookshelf for now.
mattmcmichen has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Southwest Airlines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
