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Reformation Revisited and a More Complete Analysis

Reformation Revisited and a More Complete Analysis. Net Enterprise Assets. Common Size Analysis on NEA. Used Compound Annual Growth Rate to reasonably estimate the growth of the projection period There are no large upcoming changes to Southwest’s business model

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Reformation Revisited and a More Complete Analysis

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  1. Reformation Revisited and a More Complete Analysis

  2. Net Enterprise Assets

  3. Common Size Analysis on NEA • Used Compound Annual Growth Rate to reasonably estimate the growth of the projection period • There are no large upcoming changes to Southwest’s business model • Last four years are a good estimate of future growth

  4. Projected NEA

  5. EPAT

  6. Common Size Analysis for EPAT • Used Compound Annual Growth Rate to reasonably estimate the growth of the projection period • There are no large upcoming changes to Southwest’s business model • Last four years are a good estimate of future growth

  7. Projected EPAT

  8. Key Assumptions: EATO Assumed EATO based on a combination of historical data and potential future increases in operational efficiency (per 2013 10-K). Example: The Company continues to transfer AirTran Employees and assets to Southwest. As of December 31, 2013, approximately 65 percent of AirTran Employees had been converted to Southwest Employees. Full integration is anticipated in the future

  9. Key Assumptions: EPM Assumed EPM based primarily on most recent EPM as management sees stable margins going forward.

  10. Key Assumptions: Beta Calculated Beta based on historical prices using regression analysis

  11. Key Assumptions Calculated the WACC based on historical data and management guidance

  12. Final Discounted Cash Flow Model

  13. Final Residual Income Model

  14. Final AGR Model

  15. Adjusting Date of Value Estimate: Mid Year Adjustment (15,492 *(1+.0953)^(118/365)) = 15,955 This creates a “pseudo”April 28, 2014 estimate of value while relying on data from December 31, 2013

  16. Recommendation Recommendation: SELL After capitalizing leases and other debt equivalents, a valuation analysis of LUV gives an estimated Enterprise Value of $15,955, 28.1% lower than the company’s market-based Enterprise Value of $22,201. The difference in value may be partly due to LUV’s nearly 133% run up in stock price during 2013.

  17. Works Cited • Capital IQ • SEC website • Module 12 • 2013 10-K Earnings Conference Call

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