Southwest Airlines Co. (LUV) vs. Alaska Air Group, Inc. (ALK): Which is the Better Investment?

Southwest Airlines Co. (NYSE:LUV) shares are up more than 6.84% this year and recently decreased -0.45% or -$0.24 to settle at $53.25. Alaska Air Group, Inc. (NYSE:ALK), on the other hand, is down -30.44% year to date as of 11/13/2017. It currently trades at $61.72 and has returned -3.47% during the past week.

Southwest Airlines Co. (NYSE:LUV) and Alaska Air Group, Inc. (NYSE:ALK) are the two most active stocks in the Regional Airlines industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.


One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect LUV to grow earnings at a 11.21% annual rate over the next 5 years. Comparatively, ALK is expected to grow at a 3.80% annual rate. All else equal, LUV’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 22.19% for Alaska Air Group, Inc. (ALK). LUV’s ROI is 20.60% while ALK has a ROI of 13.90%. The interpretation is that LUV’s business generates a higher return on investment than ALK’s.

Cash Flow 

The amount of free cash flow available to investors is ultimately what determines the value of a stock. LUV’s free cash flow (“FCF”) per share for the trailing twelve months was +0.47. Comparatively, ALK’s free cash flow per share was -0.75. On a percent-of-sales basis, LUV’s free cash flow was 1.37% while ALK converted -1.56% of its revenues into cash flow. This means that, for a given level of sales, LUV is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios are important because they reveal the financial health of a company. LUV has a current ratio of 0.60 compared to 0.80 for ALK. This means that ALK can more easily cover its most immediate liabilities over the next twelve months. LUV’s debt-to-equity ratio is 0.36 versus a D/E of 0.77 for ALK. ALK is therefore the more solvent of the two companies, and has lower financial risk.


LUV trades at a forward P/E of 11.94, a P/B of 3.61, and a P/S of 1.51, compared to a forward P/E of 9.60, a P/B of 2.18, and a P/S of 1.01 for ALK. LUV is the expensive of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. LUV is currently priced at a -19.57% to its one-year price target of 66.21. Comparatively, ALK is -26.4% relative to its price target of 83.86. This suggests that ALK is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 1.80 for LUV and 1.90 for ALK, which implies that analysts are more bullish on the outlook for ALK.

Risk and Volatility

To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. LUV has a beta of 1.33 and ALK’s beta is 1.04. ALK’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.LUV has a short ratio of 1.19 compared to a short interest of 3.73 for ALK. This implies that the market is currently less bearish on the outlook for LUV.


Alaska Air Group, Inc. (NYSE:ALK) beats Southwest Airlines Co. (NYSE:LUV) on a total of 7 of the 14 factors compared between the two stocks. ALK is growing fastly and higher liquidity. In terms of valuation, ALK is the cheaper of the two stocks on an earnings, book value and sales basis, ALK is more undervalued relative to its price target.

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