Here’s A Better Pick Over Southwest Airlines Stock

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We believe that United Airlines stock (NYSE: UAL) is a better pick than its industry peer, Southwest Airlines stock (NYSE: LUV), given its better prospects. Southwest Airlines
is trading at 0.8x trailing revenues compared to 0.3x for United Airlines. Investors have assigned a higher multiple to LUV stock due to its superior profitability and better financial position, as discussed below.

If we look at stock returns, United Airlines, with -7% returns in the last twelve months, has fared better than Southwest Airlines, down 32%, and the broader S&P 500 index, down 14%. There is more to the comparison, and in the sections below, we discuss why we believe UAL is a better pick over LUV. We compare a slew of factors, such as historical revenue growth, returns, and valuation, in an interactive dashboard analysis of Southwest Airlines vs. United Airlines: Which Stock Is A Better Bet? Parts of the analysis are summarized below.

1. United Airlines’ Revenue Growth Is Better

  • Both companies posted strong sales growth over the last twelve months. Still, United Airlines’ revenue growth of 82% is much higher than 51% for Southwest Airlines.
  • Even if we look at a longer time frame, United Airlines fares better, with its sales falling from $43 billion in 2019 to $15 billion in 2020 before rebounding to $45 billion in 2022. In comparison, Southwest Airlines saw its sales plunge to $9 billion in 2020 vs. $22 billion in 2019, and it surged to $24 billion in 2022.
  • The rise in revenues for both airlines over the recent years can be attributed to a rebound in air travel demand, with passenger traffic and ticket yield rising meaningfully in the last few years.
  • For perspective, United Airlines’ revenue passenger miles surged 2.8x between 2020 and 2022, while passenger revenue per available seat mile rose 68%. In comparison, Southwest Airlines’ RPM grew 2.3x, and PRASM grew 95% over the same period.
  • The demand for air travel is expected to remain high in the near
    term, boding well for both Southwest Airlines and United Airlines.
  • Our Southwest Airlines Revenue Comparison and United Airlines Revenue Comparison dashboards provide more insight into the companies’ sales.
  • Looking forward, United Airlines’ revenue is expected to grow faster than Southwest Airlines in the next three years, based on Trefis Machine Learning analysis.
  • Note that we have different methodologies for companies that are negatively impacted by Covid and those that are not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to forecast recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed three years before Covid to simulate a return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weight to growth during Covid and the last twelve months.

2. Southwest Airlines Is More Profitable And Has A Better Financial Position

  • Southwest Airlines’ operating margin of 2.7% over the last twelve months is slightly better than 1.5% for United Airlines, which has been the trend over recent years.
  • Southwest Airlines’ operating margin stood at 12.8% in 2019, before the pandemic, and it fell to -45.6% in 2020 before recovering to 2.7% in 2022. In comparison, United Airlines’ operating margin stood at 8.8% in 2019, -49% in 2020, before recovering to 1.5% in 2022.
  • Southwest Airlines’ free cash flow
    margin of 15.9% is also higher than the 13.5% for United Airlines.
  • Our Southwest Airlines Operating Income Comparison and United Airlines Operating Income Comparison dashboards have more details.
  • Looking at financial risk, Southwest Airlines fares better, with its 45% debt as a percentage of equity lower than 227% for United Airlines, and its 35% cash as a percentage of assets is also higher than 24% for the latter, implying that Southwest Airlines has a better debt position, and has more cash cushion.

3. The Net of It All

  • We see that United Airlines has demonstrated better revenue growth and is trading at a comparatively lower valuation multiple. On the other hand, Southwest Airlines is more profitable and has a better debt and cash position.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe United Airlines is the better choice.
  • The table below summarizes our revenue and return expectations for both companies over the next three years and points to an expected return of 17% for United Airlines over this period vs. a 5% expected return for Southwest Airlines stock, implying that investors are better off buying UAL over LUV, based on Trefis Machine Learning analysis – Southwest Airlines vs. United Airlines – which also provides more details on how we arrive at these numbers.

While UAL stock may outperform LUV, it is helpful to see how Southwest Airlines’ Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised at how counter-intuitive the stock valuation is for FedEx vs. Amkor.

With inflation rising and the Fed raising interest rates, among other factors, LUV stock has fallen 32% in the last twelve months. Can it drop more? See how low Southwest Airlines stock can go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

Invest with Trefis Market Beating Portfolios

See all Trefis Price Estimates

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