LUV 28.71 (+3.61%)
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Last update on 2024-06-05

Southwest Airlines (LUV) - Piotroski F-Score Analysis for Year 2023 (Final Score: 5/9)

Southwest Airlines (LUV) Piotroski F-Score Analysis for 2023 with a final score of 5/9 examining profitability, liquidity, and efficiency.

Knowledge hint:
The Piotroski F-Score is a number between 0 to 9 which reflects the strength of a company's financial position. It is based on 9 criteria involving profitability, liquidity, and leverage. This model helps investors identify stocks that are strong, undervalued investments.
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Short Analysis - Piotroski Score: 5

We're running Southwest Airlines (LUV) against the Piotroski 9-criteria scoring system to assess profitability, liquidity, and operating efficiency:

Criteria
Company has a positive net income?
1
Company has a positive cash flow?
1
Return on Assets (ROA) are growing?
0
Operating Cashflow are higher than Netincome?
1
Leverage is declining?
1
Current Ratio is growing?
0
Number of shares not diluted?
0
Cross Margin is growing?
0
Asset Turnover Ratio is growing?
1

The Piotroski F-Score for Southwest Airlines is 5 out of 9, indicating a moderate financial position. Here's the breakdown: 1. **Profitability**: Positive net income, with $465 million reported in 2023. 2. **Cash Flow**: Positive cash flow from operations ($3.16 billion) bolsters financial health. 3. **Return on Assets (ROA)**: Decrease from 0.015 in 2022 to 0.0129 in 2023, reflecting underperformance in asset profitability. 4. **Cash Flow vs Income**: Operating cash flow higher than net income, indicating healthy cash flow management. 5. **Leverage**: Reduced leverage from 0.2591 in 2022 to 0.2456 in 2023, showing decreased financial risk. 6. **Current Ratio**: Decrease from 1.4269 to 1.1386, raising concerns over short-term liquidity. 7. **Share Count**: Slight increase in shares outstanding, indicating potential dilution. 8. **Gross Margin**: Decline in gross margin from 0.1995 in 2022 to 0.1619 in 2023, suggesting reduced profitability efficiency. 9. **Asset Turnover**: Improvement from 0.6644 in 2022 to 0.7262 in 2023, indicating better asset utilization.

Insights for Value Investors Seeking Stable Income

Based on the Piotroski F-Score of 5, Southwest Airlines presents a mixed bag for potential investors. Positive indicators include profitability, strong cash flow, reduced leverage, and improved asset turnover. However, concerns arise from the declining ROA, current ratio, gross margin, and increased share dilution. Maintenance of this score would depend on how well the airline addresses profitability efficiency and liquidity concerns. If you’re considering long-term investment, it would be wise to further investigate their financial strategies and how they plan to improve the areas of concern before making a decision.

For those who are interested in delving deeper into the specifics, the subsequent section provides a comprehensive exploration of the criteria.

Profitability of Southwest Airlines (LUV)

Company has a positive net income?

The first criterion of the Piotroski analysis checks whether the company has a positive net income for the year. A positive net income indicates profitability.

Historical Net Income of Southwest Airlines (LUV)

Southwest Airlines (LUV) reported a net income of $465 million in 2023, which is positive. Thus, this criterion adds 1 point, indicating good performance in terms of profitability. Over the last 20 years, Southwest Airlines has generally reported positive net income, except for years such as 2008, 2009, and especially 2020, where the company faced a significant net loss of $3.074 billion due to extraordinary circumstances likely associated with the pandemic. Overall, the return to positive net income in 2023 is a positive trend for the airline.

Company has a positive cash flow?

The Cash Flow from Operations (CFO) measures the cash inflows and outflows generated from the core business activities. A positive CFO indicates that a company can generate ample cash from its ongoing operations to sustain and grow its business.

Historical Operating Cash Flow of Southwest Airlines (LUV)

Southwest Airlines (LUV) reported a positive CFO of $3.16 billion in 2023. This is a significant indicator of its financial health and operational efficiency. Analysis of the last 20 years of data reveals that Southwest Airlines has generally maintained a strong CFO, except for 2008 and 2020, when it experienced negative CFOs of -$1.52 billion and -$1.13 billion, respectively. The negative CFOs in these years can be attributed to the 2008 financial crisis and the COVID-19 pandemic. In most other years, Southwest maintained positive and growing cash flows, notably high figures in 2016 ($4.29 billion) and 2018 ($4.89 billion). The recent positive trend in 2023 suggests recovery and resilience, adding 1 point for Piotroski F-Score.

Return on Assets (ROA) are growing?

The criterion is based on the Change in Return on Assets (ROA). The increase in ROA is a signal of improving profitability relative to the company’s asset base.

Historical change in Return on Assets (ROA) of Southwest Airlines (LUV)

For Southwest Airlines' ROA to contribute positively to the Piotroski Score, we must see an increase from one year to the next. In 2022, Southwest's ROA stood at 0.015, while in 2023, it decreased to 0.0129. This decline results in a score of 0 for this criterion. It's also crucial to compare these figures within the context of industry standards. The median ROA for the airline industry in 2022 was 0.1607, indicating that Southwest underperformed relative to its peers in that year. Traditionally, Southwest Airlines has struggled with extremely volatile and occasionally negative cash flows. For instance, in 2020, amidst the COVID-19 pandemic, the operating cash flow was negative $1,127 million. This volatility can make it more challenging for the airline to achieve consistent ROA growth. The decline in ROA, although marginal, suggests that the airline needs to better utilize its assets to generate profit. Therefore, this trend is not favorable for the given criteria.

Operating Cashflow are higher than Netincome?

Operating Cash Flow higher than Net Income is an indication of a company's ability to generate more cash from its operations than the profits it reports, a sign of strong financial health.

Historical accruals of Southwest Airlines (LUV)

In 2023, Southwest Airlines (LUV) reported an Operating Cash Flow of $3.164 billion compared to a Net Income of $465 million. This means the operating cash flow is significantly higher than the net income, earning 1 point in this criteria. Historically, examining the past 20 years of data, Southwest Airlines has shown fluctuating operating cash flows and net incomes, especially during economic downturns like in 2008 and 2020. The current trend of having operating cash flow higher than net income suggests efficient management of operations and good cash flow health, despite potential impacts from adverse economic conditions. This trend is positive and favorable for investors who prioritize operating efficiency and cash strength.

Liquidity of Southwest Airlines (LUV)

Leverage is declining?

Change in Leverage measures the variation in debt relative to equity and/or assets compared to the previous period.

Historical leverage of Southwest Airlines (LUV)

Comparing leverage ratios, in 2022 Southwest Airlines (LUV) recorded a leverage of 0.2591 while in 2023 it was 0.2456. This indicates a decrease in leverage for 2023. Historically, the leverage has experienced fluctuations over the last 20 years; the highest being during the 2020 and 2021 periods, 0.3375 and 0.3191 respectively, which can be linked to the pandemic-induced financial strain. The leverage decrease in 2023 by 0.0135 points (from 0.2591 to 0.2456) can be viewed positively as it suggests Southwest Airlines has reduced its reliance on debt financing. A decreased leverage generally implies a stronger balance sheet, reduced financial risk, and increased financial flexibility, hence we add 1 point for this positive trend.

Current Ratio is growing?

The current ratio measures a company's ability to pay short-term obligations with its short-term assets. This ratio is important because it indicates a company's liquidity position.

Historical Current Ratio of Southwest Airlines (LUV)

For Southwest Airlines (LUV), the current ratio decreased from 1.4269 in 2022 to 1.1386 in 2023, indicating a decline in liquidity. This trend is not favorable, as it suggests that LUV is slightly less capable of covering its short-term liabilities with its current assets compared to the previous year, earning a score of 0 in this criterion. While 1.1386 is still above the industry median of 0.8112 in 2023, the downward trend should be noted. Over the past 20 years, the company's current ratio has seen significant fluctuations, peaking at 2.0214 in 2020 and hitting lows in mid-2010s. Comparing to the industry's median, LUV has generally maintained a better liquidity position, but the recent dip should be a point of concern for investors.

Number of shares not diluted?

The change in shares outstanding refers to the number of shares a company has issued and are currently held by shareholders. It's vital because an increasing number of shares can dilute earnings per share (EPS), whereas a decrease indicates share buybacks, usually seen as a signal of confidence by management.

Historical outstanding shares of Southwest Airlines (LUV)

Between 2022 and 2023, Southwest Airlines' outstanding shares increased from 593 million to 595 million, representing an increment of 2 million shares. Therefore, no point is added for this criterion (0 points). This indicates that Southwest Airlines (LUV) did not engage in share buybacks in the past year. Typically, an increase in outstanding shares can dilute shareholders' ownership percentage, potentially impacting earnings per share (EPS). Historically, since 2003, the trend has shown a general decline in outstanding shares, from 818.5 million to a minimum of 538 million in 2020, suggesting several buybacks over the years before a recent increase in 2023. This deviation might indicate investment in growth, acquisitions, or compensating employees with stock options.

Operating of Southwest Airlines (LUV)

Cross Margin is growing?

This criterion focuses on the company's gross margin, which measures the proportion of money left over from revenues after accounting for the cost of goods sold. A higher gross margin indicates better efficiency and profitability.

Historical gross margin of Southwest Airlines (LUV)

In 2023, Southwest Airlines' gross margin (GM) is 0.1619, compared to 0.1995 in 2022, marking a decline. This downward trend is unfavorable, as the gross margin decreased by approximately 18.9%. Despite other financial aspects worth considering, this particular dip suggests worsening efficiency in converting revenue into actual profit. Historically, the company's GM saw a peak of around 0.7238 in 2009 but has since experienced considerable fluctuation, falling significantly in recent years. Moreover, the 2023 GM lies below the industry median (0.198), indicating underperformance relative to peers. Based on this criterion, Southwest Airlines earns 0 points for the Piotroski score.

Asset Turnover Ratio is growing?

Asset turnover is an efficiency ratio that measures a company's ability to generate sales from its assets. An increasing asset turnover ratio implies the company is utilizing its assets more effectively.

Historical asset turnover ratio of Southwest Airlines (LUV)

Comparing the Asset Turnover of 0.7262 in 2023 with 0.6644 in 2022, we observe an increase. This increase results in an additional point per the Piotroski F-Score analysis framework. Historically, the 2023 figure represents a substantial recovery, especially post-2020, where the ratio dipped to 0.2992. The sustained upward trend since 2020 highlights operational improvements and enhanced asset efficiency for Southwest Airlines, pointing towards robust asset management amidst recovery.


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