DCF Studio

    LUV · NYQ · Industrials

    Southwest Airlines Co.

    Also onShortfallConsensus DriftCrosscheck

    Implied value per share

    USD -16.98

    Market price

    USD 40.98

    Implied upside

    -141.4%

    5-year forecast · Perpetuity growth terminal value · Mid-year discounting · Base case

    AdjustedFree cashflow is negative in at least one forecast year, so terminal value carries most of the valuation.
    AdjustedCapital expenditure runs at 11.8% of revenue against depreciation of 5.8%. A perpetuity has to be a steady state, so the terminal year uses maintenance capex at depreciation and then charges the reinvestment terminal growth requires (g/ROIC of NOPAT). The bridge is shown under Terminal Value.

    Value Per Share

    Perpetuity growth
    USD -16.98-141.4%
    Exit multiple
    USD 14.74-64.0%
    Market price
    USD 40.98

    Same forecast, different terminal treatment. Percentages vs price.

    Forecast Cashflows

    Reporting currency (USD). Outflows negative.

    -3039655007-15198275030FY26FY27FY28FY29FY30
    Nominal FCFFDiscounted to todayUSD
    LineFY26FY27FY28FY29FY30CAGR
    RevenueUSD 29.6bnUSD 31.3bnUSD 33.1bnUSD 34.9bnUSD 36.9bn+5.6%
    EBITUSD 579.7mUSD 612.3mUSD 646.7mUSD 683.1mUSD 721.5m+5.6%
    NOPATUSD 457.9mUSD 483.7mUSD 510.9mUSD 539.6mUSD 570.0m+5.6%
    Add depreciation & amortisationUSD 1.7bnUSD 1.8bnUSD 1.9bnUSD 2.0bnUSD 2.1bn+5.6%
    Less capital expenditureUSD -3.5bnUSD -3.7bnUSD -3.9bnUSD -4.1bnUSD -4.3bn+5.6%
    Less increase in working capitalUSD -1.1bnUSD -1.2bnUSD -1.3bnUSD -1.3bnUSD -1.4bn+5.6%
    Free cashflow to firmUSD -2.4bnUSD -2.6bnUSD -2.7bnUSD -2.9bnUSD -3.0bn-5.6%
    Discount factor0.95640.87470.80000.73170.6693-
    Present valueUSD -2.3bnUSD -2.3bnUSD -2.2bnUSD -2.1bnUSD -2.0bn+3.4%
    Present Value Of The ForecastUSD -10.9bn

    Discount Rate

    Source shown per component. All overridable above.

    Risk-free rate5.00%US 10-year Treasury (^TNX)
    Equity risk premium5.50%Market assumption
    Beta1.080Reported 1.120, pulled toward 1.0 (Blume)
    Cost of equity10.94%Risk-free + beta x equity risk premium
    Cost of debt5.00%Floored at the risk-free rate (implied cost of debt was lower)
    Market capitalisationUSD 20.0bn77.0% of capital
    Total debtUSD 6.0bn23.0% of capital, book value as a proxy
    Tax rate21.0%Effective, capped at statutory
    WACC9.33%E/V x Re + D/V x Rd x (1 - t)

    Terminal Value

    Perpetuity growth is intrinsic. The exit multiple defaults to the company's current EV/EBITDA, so it answers a different question - what the shares are worth if today's rating holds and EBITDA grows as forecast.

    Perpetuity growth at 2.50%

    Value per shareUSD -16.98

    -62% of EV

    Forecast FCFF, final year
    USD -3.0bn
    Capex at depreciation, working capital in reinvestment
    USD 570.0m
    Less reinvestment at g/ROIC (26.8% of NOPAT)
    USD -152.7m
    Capitalised
    USD 417.3m
    ROIC (WACC floor)
    9.3%
    Terminal value, undiscounted
    USD 6.3bn
    Terminal value, discounted
    USD 4.2bn
    Enterprise value
    USD -6.7bn
    Less net debt
    USD 2.8bn
    Equity value
    USD -9.5bn

    Exit at 11.5x EBITDA

    Value per shareUSD 14.74

    199% of EV

    Terminal value, undiscounted
    USD 32.7bn
    Terminal value, discounted
    USD 21.9bn
    Enterprise value
    USD 11.0bn
    Less net debt
    USD 2.8bn
    Equity value
    USD 8.2bn

    Sensitivity

    Value per share (USD) by discount rate and long-run growth.

    Long-run growth
    Discount rate1.50%2.00%2.50%3.00%3.50%
    7.33%-15.11-15.06-15.00-14.95-14.90
    8.33%-16.25-16.21-16.16-16.12-16.08
    9.33%-17.05-17.01-16.98-16.94-16.90
    10.33%-17.61-17.58-17.55-17.52-17.48
    11.33%-18.00-17.98-17.95-17.92-17.89

    Outlined: this model. Green text: above today's price of 40.98. Shading: distance from this model's own value.

    Priced In

    What each input would have to be to justify the current price, one at a time.

    InputModelImpliedGap
    EBIT margin2.0%12.1%+10.1pp
    Discount rate9.3%2.6%-6.7pp
    Download as Excel

    Live formulas, not pasted numbers - edit a driver and the workbook reprices.

    Yahoo Finance and RBA data. General information, not advice. Methodology.