Management Finance Assignment

128 96 80 64 48 40 32 24

16 12

Percent shares traded

60 40 20

Target Price Range 2020 2021 2022

SOUTHWEST AIRLINES NYSE-LUV 55.20 13.5 16.919.0 0.71 1.1% TIMELINESS 3 Raised 6/30/17 SAFETY 3 New 7/27/90 TECHNICAL 1 Raised 8/4/17 BETA 1.15 (1.00 = Market)

2020-22 PROJECTIONS Ann’l Total

Price Gain Return High 100 (+80%) 17% Low 65 (+20%) 6% Insider Decisions

O N D J F M A M J to Buy 0 0 0 0 0 0 0 0 0 Options 0 0 0 0 9 0 0 10 0 to Sell 0 0 2 1 5 1 0 7 0 Institutional Decisions

3Q2016 4Q2016 1Q2017 to Buy 328 295 339 to Sell 371 428 390 Hld’s(000) 476220 500875 525933

High: 18.2 17.0 16.8 11.8 14.3 13.6 10.6 19.0 43.2 51.3 51.3 64.4 Low: 14.6 12.1 7.1 4.9 10.4 7.1 7.8 10.4 18.8 31.4 34.0 48.7

% TOT. RETURN 7/17 THIS VL ARITH.*

STOCK INDEX 1 yr. 51.3 14.4 3 yr. 100.9 26.9 5 yr. 527.4 95.3

CAPITAL STRUCTURE as of 6/30/17 Total Debt $3095 mill. Due in 5 Yrs $2000 mill. LT Debt $2788 mill. LT Interest $120 mill.

(25% of Cap’l)

Leases, Uncapitalized Annual rentals $715 mill. No Defined Benefit Pension Plan Pfd Stock None

Common Stock 605,000,000 shs. MARKET CAP: $33.4 billion (Large Cap) CURRENT POSITION 2015 2016 6/30/17

($MILL.) Cash Assets 3051 3305 3152 Receivables 474 546 576 Inventory (Avg Cst) 311 337 365 Other 188 310 250 Current Assets 4024 4498 4343 Accts Payable 1188 1178 1217 Debt Due 637 566 307 Other 5581 5100 5573 Current Liab. 7406 6844 7097

ANNUAL RATES Past Past Est’d ’14-’16 of change (per sh) 10 Yrs. 5 Yrs. to ’20-’22 Sales 12.0% 12.5% 9.0% ‘‘Cash Flow’’ 14.5% 28.0% 12.0% Earnings 17.5% 44.5% 12.0% Dividends 32.0% 73.0% 20.0% Book Value 4.0% 7.5% 11.0%

Cal- Full endar Year

QUARTERLY REVENUES ($ mill.) Mar.31 Jun.30 Sep.30 Dec.31

2014 4166 5011 4800 4628 18605 2015 4414 5111 5318 4977 19820 2016 4826 5384 5139 5076 20425 2017 4883 5744 5460 5313 21400 2018 5250 5950 5750 5600 22550 Cal- Full

endar Year EARNINGS PER SHARE A

Mar.31 Jun.30 Sep.30 Dec.31 2014 .22 .67 .48 .27 1.64 2015 .66 .90 .89 .82 3.27 2016 .79 1.29 .62 .85 3.55 2017 .57 1.23 1.10 1.00 3.90 2018 .77 1.38 1.22 1.13 4.50 Cal- Full

endar Year QUARTERLY DIVIDENDS PAID B

Mar.31 Jun.30 Sep.30 Dec.31 2013 .010 .010 .040 .040 .10 2014 .040 .040 .060 .060 .20 2015 .060 .075 .075 .075 .285 2016 .075 .10 .10 .10 .375 2017 .10 .125

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 7.24 7.11 7.52 8.32 9.52 11.60 13.42 14.90 13.93 16.19 20.27 23.40 25.21 27.52 .95 .71 .86 .95 1.18 1.41 1.40 1.21 1.02 1.58 1.35 1.73 2.31 3.07 .51 .24 .36 .38 .57 .72 .61 .40 .19 .73 .43 .56 1.05 1.64 .02 .02 .02 .02 .02 .02 .02 .02 .02 .02 .02 .04 .13 .22

11.61 12.17 13.36 15.19 16.22 17.69 20.63 21.45 21.39 21.87 23.84 26.70 29.66 33.30 5.24 5.69 6.40 7.04 8.38 8.23 9.45 6.69 7.36 8.34 8.90 9.57 10.45 10.02

766.77 776.66 789.39 784.98 796.44 783.31 734.80 739.99 742.79 747.43 772.56 730.32 702.00 675.99 35.8 NMF 44.8 39.2 25.9 22.9 24.2 31.6 41.8 17.0 24.2 16.0 13.5 17.6 1.83 NMF 2.55 2.07 1.38 1.24 1.28 1.90 2.78 1.08 1.52 1.02 .76 .93 .1% .1% .1% .1% .1% .1% .1% .2% .2% .2% .2% .4% .9% .8%

9861.0 11023 10350 12104 15658 17088 17699 18605 72.6% 71.2% 76.0% 79.3% 80.9% 80.3% 80.1% 82.5% 10.4% 11.2% 8.9% 14.6% 9.9% 8.6% 12.1% 17.0% 555.0 599.0 616.0 628.0 715.0 844.0 867.0 938.0 471.0 294.0 140.0 550.0 330.0 421.0 754.0 1136.0

38.2% 39.3% 31.7% 38.3% 40.9% 38.5% 37.6% 37.4% 4.8% 2.7% 1.4% 4.5% 2.1% 2.5% 4.3% 6.1%

2050.0 3541.0 3325.0 2875.0 3107.0 2883.0 2191.0 2434.0 6941.0 4953.0 5466.0 6237.0 6877.0 6992.0 7336.0 6775.0

5.9% 4.1% 2.5% 6.7% 4.1% 5.0% 8.6% 13.0% 6.8% 5.9% 2.6% 8.8% 4.8% 6.0% 10.3% 16.8% 6.6% 5.7% 2.3% 8.6% 4.6% 5.7% 9.3% 14.7%

3% 4% 9% 2% 4% 5% 9% 13%

2015 2016 2017 2018 © VALUE LINE PUB. LLC 20-22 30.61 33.20 36.60 40.25 Revenues per sh 51.00 4.94 5.63 6.25 7.10 ‘‘Cash Flow’’ per sh 9.00 3.27 3.55 3.90 4.50 Earnings per sh A 5.50 .29 .38 .48 .58 Div’ds Decl’d per sh B .88

38.12 43.02 45.00 45.00 Gross Equipment per sh 50.00 11.36 13.72 14.70 16.80 Book Value per sh 22.00

647.60 615.16 585.00 560.00 Common Shs Outst’g C 500.00 12.5 11.7 Bold figures are

Value Line estimates

Avg Ann’l P/E Ratio 15.0 .63 .62 Relative P/E Ratio .95

.7% .9% Avg Ann’l Div’d Yield 1.1%

19820 20425 21400 22550 Revenues ($mill) 25500 83.6% 84.0% 84.0% 84.0% Load Factor 84.0% 25.9% 24.4% 25.0% 25.5% Operating Margin 25.0% 1015.0 1221.0 1300 1400 Depreciation ($mill) 1665 2181.0 2244.0 2360 2580 Net Profit ($mill) 2840 37.3% 36.7% 37.0% 37.0% Income Tax Rate 37.0% 11.0% 11.0% 11.0% 11.4% Net Profit Margin 11.1% 2541.0 2821.0 2900 3000 Long-Term Debt ($mill) 3000 7358.0 8441.0 8600 9400 Shr. Equity ($mill) 11000 22.6% 20.5% 20.5% 21.0% Return on Total Cap’l 20.5% 29.6% 26.6% 27.5% 27.5% Return on Shr. Equity 26.0% 27.2% 24.0% 23.5% 23.5% Retained to Com Eq 21.0%

9% 11% 12% 13% All Div’ds to Net Prof 16%

Company’s Financial Strength A Stock’s Price Stability 50 Price Growth Persistence 65 Earnings Predictability 50

(A) Diluted earnings. Includes profits and losses from sale of operating equipment. Ex- cludes nonrecurring gains/(losses): ’01, 12¢; ’05, 7¢; ’06, (11¢); ’07, 23¢; ’08, (16¢); ’09,

(6¢); ’10, (12¢); ’11, (20¢). Quarterly totals may not sum to yearend figures due to changes in outstanding shares. Next earnings report due late October.

(B) Dividends historically paid in early January and late March, June, and September. (C) In millions.

BUSINESS: Southwest Airlines is one of the largest carriers in the United States by revenues and the largest by passengers flown. Specializes in low fares & short-hauls. Uses point-to-point, versus common hub-and-spoke model. Acquired AirTran, 5/11. At 12/31/16, served 101 destinations; operated fleet of 723 aircraft (134 leased); On order: 287 additional aircraft, w/ option for 191

more. Has approximately 53,500 employees. Ownership: PRIMECAP Management, 11.8%; Berkshire Hathaway, 7.0%; Vanguard Group, 6.2%; officers and directors, less than 1% (4/17 proxy). Chairman/CEO/President: Gary Kelly. Incorporated: TX. Ad- dress: P.O. Box 36611, 2702 Love Field Drive, Dallas, TX 75235. Telephone: 214-904-4000. Internet: www.southwest.com.

Investors weren’t too happy about Southwest’s latest quarterly results. The stock fell more than 5% in value after the company easily topped EPS and sales expectations, but failed to report strong unit revenue gains. RASM, a closely watched measure of the amount taken in for each seat mile flown, increased just 1.5%, year over year, well below the indus- try average of about 3.0% during the sec- ond period. Southwest attributed some of the weakness to temporary pressure from its transition to a new reservation system. However, this was largely negated by the shift in the Easter holiday to April (from March in 2016) that, by our estimates, boosted passenger traffic and unit revenue growth by 1%-2%. The uninspiring outlook did nothing to assuage investor concerns. The com- pany expects the new reservation system to have a bigger impact in the third quarter, and has subsequently lowered its year-over-year RASM guidance to 1%. September-period unit costs (excluding fuel and profit-sharing expenses) will like- ly advance 2%-3%, with wage increases ac- counting for much of that. Southwest also

said its fuel costs would be in the $1.95 to $2.00 per gallon range, which would be flat to slightly lower compared to last year. The capital-return program is some- thing to smile about. LUV has returned $1.15 billion through buybacks and dividends in the first six months of 2017, and remains on track to return more than $2.4 billion to shareholders through the end of the year. Likewise, the current divi- dend, while nothing to write home about, is set to grow rapidly though 2020-2022. The balance sheet remains strong. The carrier ended the second quarter with a debt-to-capitalization ratio of 25%, by far the lowest among the major U.S. airlines. LUV also continues to maintain an investment-grade credit rating, a rarity in this industry. These neutrally ranked shares offer above-average price appreciation potential relative to the Value Line median over the 3- to 5-year horizon. Although Southwest’s short-term forecast was not what investors had been hoping for, the longer-term outlook, in our view, remains bright as ever. Daniel Henigson August 25, 2017

LEGENDS 11.0 x ″Cash Flow″ p sh

. . . . Relative Price Strength Options: Yes Shaded area indicates recession

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