Southwest Airlines Co. (LUV)

Discount cash flow analysis

Sell Overvalued by 62.7%

5% margin of safety What's this?

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How does this work?

This is an interactive analyst report for Southwest Airlines Co., based on a discounted cash flow valuation approach.

You can modify the assumptions and the valuation will be updated automatically. You can also save and share your valuation.

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Values in $ millions
2007 2008 2009 2010 2011 2012 2013 2014
 
                 
               
 

What will the revenues be in the future?

Growth beyond year three is driven by the terminal growth rate.

Price history

Sensitivity matrix

   
-1%
Discount Rate %
0%

1%
  -1% $13.90 $13.69 $13.48
Terminal Growth% 0 $13.97 $13.76 $13.56
  +1% $14.05 $13.84 $13.63

How does a change in discount rate or terminal growth affect valuation?

This table shows the sensitivity of the valuation to two key variables - the discount rate and the terminal growth rate

Valuations and comments

  • Valuecruncher created a new valuation of $76.59 (undervalued by 107.5%) - 12 months ago
  • jim1023 created a new valuation of $0.73 (overvalued by 93.94%) - over 7 years ago
  • alext created a new valuation of $6.83 (overvalued by 5.14%) - over 8 years ago
  • SethWellbourne created a new valuation of $2.94 (overvalued by 52.35%) - over 8 years ago
  • GordonGekko created a new valuation of $6.17 (undervalued by 19.34%) - over 8 years ago
  • GordonGekko created a new valuation of $12.23 (overvalued by 1.61%) - over 9 years ago
  • KiwiEMH created a new valuation of $13.76 (overvalued by 9.47%) - over 9 years ago
  • Abo created a new valuation of $16.29 (undervalued by 3.1%) - over 9 years ago

Comments

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The boring details

All amounts in millions Figures
Enterprise Value: 26,321
Net Debt (Long-term borrowings less cash): -688
Equity Value: 9,542
Number of Shares Outstanding: 731,000,000
Calculated value per share: $13.76

Enterprise Value is the present value of the post-tax cash flows for a business into the future.


Calcuation of EV

Where:

  • C1, C2, C3 - the cash flow in period 1, 2, 3, ...
  • r - the discount rate

To capture the cash flows into the future a terminal value is calculated via a perpetuity calculation -
based on the final years forecast post-tax free cash flow.


Perpetuity

Where:

  • Cn - the cash flow in the final forecast period.
  • LTG - the long-term growth rate
  • r - the discount rate
  • g - the terminal growth rate

The Capital Asset Pricing Model (CAPM) is used to determine the equity component in the discount rate.


CAPM model

Where:

  • rt - the risk free rate
  • t - the tax rate
  • B - the beta of the company
  • MRP - the Market Risk Premium

Valuecruncher uses an estimate of Weighted Average Cost of Capital (WACC) to determine the discount rate in the calculation.