Using the Earnings Power Value framework with a WACC of 7.8% and normalized earnings of $2.1B, Southwest Airlines Co. has a fair value of $44.02 per share. The EPV range is $36.09 – $55.74 based on WACC sensitivity (6.3% – 9.3%).
| Low | Selected | High | |
|---|---|---|---|
| Normalized Earnings | 2,120 | 2,120 | 2,120 |
| (/) WACC | 9.3% | 7.8% | 6.3% |
| Enterprise Value | 22,889 | 27,312 | 33,854 |
| (-) Net debt | 2,750 | 2,750 | 2,750 |
| Equity Value | 20,139 | 24,562 | 31,104 |
| (/) Outstanding shares | 558 | 558 | 558 |
| Fair Price | $36.09 | $44.02 | $55.74 |
Earnings Power Value (EPV) estimates what a company is worth based on its current normalized earnings, assuming zero growth. It values the business as a perpetuity: Normalized Earnings / WACC. This gives a conservative floor value — the company's worth if it never grows but maintains its current profitability.
The model normalizes earnings by: (1) using sustainable gross margins (5-year average) applied to current revenue, (2) deducting maintenance-level operating expenses (average R&D + SG&A as % of revenue), (3) applying the average effective tax rate, and (4) subtracting the average excess of CapEx over D&A (net reinvestment needed to maintain current capacity).
EPV is most useful as a comparison anchor: if the market price is below EPV, the stock may be undervalued even without any growth. If market price exceeds EPV, the premium reflects growth expectations — which may or may not materialize.