How Southwest Airlines stock has been moving

Southwest Airlines (LUV) has seen mixed share performance recently, with a 0.3% decline over the past day, around 9% gain over the past month, and roughly 24% decline over the past 3 months.

For context, the stock closed at US$41.39, with year to date total return near flat and roughly 36% total return over the past year. The 3 year total return is about 53%, and the 5 year figure reflects a 25% decline.

Recent share price returns tell a mixed story, with a solid 30 day gain sitting against a weaker 90 day share price return and a 5 year total shareholder loss, even as the 1 year and 3 year total shareholder returns remain firmly positive. This shift suggests investors have become more cautious in the short term, even though longer term holders have still seen meaningful value created.

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With the stock near flat year to date but showing a roughly 36% one-year total return and an intrinsic value estimate implying a large discount, the key question is whether Southwest is genuinely undervalued or if the market already reflects future growth.

Most Popular Narrative: 8.5% Undervalued

Compared with Southwest Airlines' last close at $41.39, the most followed narrative puts fair value at about $45.25, indicating a modest discount that hinges on specific growth and margin assumptions.

Planned introduction of premium and assigned seating, along with basic economy offerings, can enhance revenue yield through differentiated pricing strategies catering to varied consumer preferences, thereby potentially boosting net margins and overall earnings. Streamlined operations through a decrease in turn time at 19 major stations, alongside a leading industry on-time performance, suggests potential operational efficiency improvements.

Want to understand what is really driving that higher fair value estimate? The narrative leans heavily on a blend of revenue expansion, higher margins, and a future earnings multiple that assumes investors continue to pay a premium for those improvements. Curious how those moving parts add up in the model and what would need to happen by the end of the decade for that price to make sense?

Result: Fair Value of $45.25 (UNDERVALUED)

However, there is still a real chance that higher jet fuel costs or softer leisure demand could pressure margins and challenge the earnings assumptions behind that fair value.

Another View On Valuation

The narrative and fair value estimate lean on future earnings and margins, but today's P/E of 24.8x tells a different story. That is far above the global airlines average of 8.7x and above peer average of 17.6x. It is also very close to the fair ratio of 25x, which is where the market could eventually settle. Is the stock already pricing in much of the improvement that the story depends on, or is this just the starting point if the thesis plays out?

For a closer look at how this valuation stacks up against sector and peer benchmarks, including how the current P/E compares with the fair ratio in more detail, See what the numbers say about this price — find out in our valuation breakdown.

Next Steps

With such a mixed picture on price and valuation, it makes sense to move quickly, test the assumptions yourself, and see how the balance of upside and downside risk really looks given the 3 key rewards and 1 important warning sign

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.