One Year Target Price Range: $69.66 - $73.62
Southwest Airlines (NYSE: LUV) offers promising growth opportunities relative to its current share price (closed at $62.08 as of 7/12/17), and proves to be a dominant provider of scheduled air travel services (24% domestic market share) in the United States with plenty of room to grow internationally. With an emphasis on modernization of its Boeing fleets, the Company's average age of operated aircraft is 12 years old as Southwest looks to streamline energy efficiency and add paid-for ancillary services that regional airlines cannot afford to offer.
The Company also emphasizes the return of cash to its shareholders through dividends and share repurchase agreements. The Company's dividend payout ratio has increased from 9.9% in 2014 to 12% TTM as of 3/31/2017. Southwest continues to repurchase shares on the public markets, increasing its spending in this arena from $955 million in 2014 to about $1.8 billion in the TTM up to Q1 2017. It is currently in the midst of a $2 billion share repurchase program with ample cushion from annual cash receipts net of capital expenditures to continue such programs.
A five-year discounted cash flow analysis yields an equity value per share of $73.98, and a one year price target of $80.68. This analysis supports the conservative one year price range of $69.66 - $73.62 based on a capitalization rate of 17.5x to 18.5x and projected FY1 EPS of $3.98. Please find the full equity research report attached to this article: Equity_Research_LUV_7-13-17.pdf.
This article will be the first in a series of bottom-up research reports about participants in the airline industry.
Disclosure: I am/we are long LUV.
Additional disclosure: I initiated a small long position upon completing this research, and may add to that position over the course of the next few months.