Southwest Airlines Co. (LUV) vs. Union Pacific Corporation (UNP): Which is the Better Investment?

Southwest Airlines Co. (NYSE:LUV) shares are down more than -12.41% this year and recently decreased -3.63% or -$2.16 to settle at $57.33. Union Pacific Corporation (NYSE:UNP), on the other hand, is up 15.18% year to date as of 10/10/2018. It currently trades at $154.46 and has returned -5.27% during the past week.

Southwest Airlines Co. (NYSE:LUV) and Union Pacific Corporation (NYSE:UNP) are the two most active stocks in the Regional Airlines industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.


The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect LUV to grow earnings at a 17.15% annual rate over the next 5 years. Comparatively, UNP is expected to grow at a 18.01% annual rate. All else equal, UNP’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. , compared to an EBITDA margin of 48.31% for Union Pacific Corporation (UNP). LUV’s ROI is 17.50% while UNP has a ROI of 12.80%. The interpretation is that LUV’s business generates a higher return on investment than UNP’s.

Cash Flow

Cash is king when it comes to investing. LUV’s free cash flow (“FCF”) per share for the trailing twelve months was +1.73. Comparatively, UNP’s free cash flow per share was +1.14. On a percent-of-sales basis, LUV’s free cash flow was 4.68% while UNP converted 3.97% 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

Balance sheet risk is one of the biggest factors to consider before investing. LUV has a current ratio of 0.70 compared to 1.00 for UNP. This means that UNP 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 1.15 for UNP. UNP is therefore the more solvent of the two companies, and has lower financial risk.


LUV trades at a forward P/E of 11.37, a P/B of 3.31, and a P/S of 1.56, compared to a forward P/E of 17.46, a P/B of 5.90, and a P/S of 5.21 for UNP. LUV is the cheaper 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

Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. LUV is currently priced at a -16.91% to its one-year price target of 69.00. Comparatively, UNP is -7.42% relative to its price target of 166.84. This suggests that LUV is the better investment over the next year.

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 0.98 and UNP’s beta is 0.86. UNP’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. LUV has a short ratio of 3.99 compared to a short interest of 4.25 for UNP. This implies that the market is currently less bearish on the outlook for LUV.


Southwest Airlines Co. (NYSE:LUV) beats Union Pacific Corporation (NYSE:UNP) on a total of 10 of the 14 factors compared between the two stocks. LUV generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, LUV is the cheaper of the two stocks on an earnings, book value and sales basis, LUV is more undervalued relative to its price target. Finally, LUV has better sentiment signals based on short interest.

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