Southwest Airlines (LUV) Stock May Be A Bargain After Loyalty Program Revamp

Southwest Airlines has delivered a strong share price run over the past few years, yet the stock has slipped in recent weeks, which puts fresh focus on whether the current valuation lines up with the cash the airline can generate. With loyalty program changes, potential long haul ambitions, and new technology initiatives all in play, the question is how much of that future is already reflected in today's price.

• Southwest shares have gained 74.0% over the past 3 years, so a lot now depends on whether the underlying cash flows can support that kind of rerating.
• The planned Rapid Rewards revamp and possible move into longer haul flying can influence future spending needs and the timing of when loyalty and route investments translate into cash generation.
• If you'd rather focus on earnings, this one's for you. See why Southwest Airlines's 23.1x P/E tells a different valuation story.

For investors, the debate is whether Southwest Airlines' recent share price, after that multi year climb and the latest pullback, is adequately backed by the cash flows implied by a Discounted Cash Flow (DCF) intrinsic value view.

If you are weighing whether Southwest Airlines' recent 74.0% three year return is well supported by its cash flows, it can help to line that up against other 33 high quality undervalued stocks

Is Southwest Airlines Still Cheap on Cash Flow?

The Discounted Cash Flow (DCF) approach here projects what Southwest Airlines could return to shareholders in future cash, then brings that back into today’s dollars. Latest twelve month free cash flow is reported as a loss of $225.2 million, yet the model assumes a shift to positive free cash flow in the coming years and then a more measured, mature growth pace after that. Discounted projections through 2036 point to a business that needs sustained improvement in cash generation to justify the current re rating.

Under those cash flow assumptions, the DCF view puts Southwest Airlines’ estimated intrinsic value substantially above the current share price of $39.50. The planned Rapid Rewards overhaul with new tiers and lounges helps explain why the market is already pricing in heavier investment before those loyalty benefits and any longer haul flying ambitions flow through to cash. That leaves a gap between what the discounted cash flows imply and the price you see on screen today. Find out what Southwest Airlines could be worth using our Discounted Cash Flow (DCF) estimate.

The Southwest Airlines Narrative: What Would Justify Today's Price?

Simply Wall St Narratives for Southwest Airlines pick up where the valuation puzzle leaves off and explain which assumptions about future growth, margins and earnings would need to play out for the stock to be worth materially more or materially less than today’s price, on the Community page. Each narrative presents Southwest Airlines' implied fair value as a thesis about the business that can be tracked over time rather than a one off snapshot.

The Simply Wall St community now splits into two clear camps on Southwest Airlines, with one group seeing upside left and the other arguing expectations already look full.

Bull case: 20% undervalued

"Rapid Rewards loyalty engagement, including nearly 100 million members, higher tier qualification activity, and stronger co branded card acquisitions with Chase, supports further growth in high margin loyalty and card economics…"

Discover why this Narrative puts Southwest Airlines at 20% undervalued.

Bear case: 16% overvalued

"Although new seating products and bag fees are expected to add more than US$2b of EBIT across 2026 and 2027, jet fuel at around 20 year highs and an almost US$900m year over year fuel expense increase risk absorbing much of that contribution and keeping net margins under pressure…"

Explore why this Narrative puts Southwest Airlines at 16% overvalued.

The unresolved question for Southwest Airlines investors

Southwest Airlines' cash flow story is only part of what matters, because recent checks have also highlighted specific risks that could change how you think about the stock once you see them. Take a closer look at 1 warning sign before settling on a valuation.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com