On Wednesday, Raymond (NS:RYMD) James analyst Savanthi Syth reaffirmed an Outperform rating for Southwest Airlines (NYSE:NYSE:LUV), a $19.7 billion market cap carrier with annual revenues of $27.4 billion, maintaining a steady price target of $40.00. According to InvestingPro analysis, the stock currently appears slightly undervalued based on its Fair Value assessment. The analyst's statement followed Southwest's performance on Tuesday, where the airline's shares fell by approximately 2.8%, underperforming compared to the 1.2% average gain of its U.S. peers.
The decline was attributed to an estimated 3% devaluation from increased ownership costs due to a recently announced sale-leaseback (SLB) transaction. InvestingPro data shows that 8 analysts have recently revised their earnings upwards for the upcoming period, suggesting potential optimism about the company's future performance.
Syth noted that while the transaction's optics and the timing of the gains and costs might not have been impressive, it is expected to be the first in a series of deals that could offer more substantial benefits. Such future transactions would depend on Southwest's ability to sell aircraft, which in turn would require confidence in Boeing (NYSE:BA)'s delivery capabilities. The analyst emphasized that this approach aligns with Southwest's strategy outlined during their September Investor Day.
The report also included adjustments to the forecasted quarterly year-over-year CASM-Ex (unit cost excluding fuel and profit sharing) for 2025, although the full-year outlook remains unchanged, aside from the higher ownership expenses. Syth expressed a belief that there are no structural issues that Southwest cannot address given enough opportunities—or "shots on goal"—to facilitate margin recovery.
Southwest Airlines, according to the Raymond James analyst, remains the only U.S. carrier in their coverage incentivizing management through return on invested capital (ROIC) targets and maintaining a net cash position. These factors contributed to the reaffirmation of the Outperform rating on Southwest's stock. InvestingPro confirms this strong cash position, noting it as one of several key advantages in their comprehensive Pro Research Report, which provides detailed analysis of over 1,400 US stocks.
In other recent news, Southwest Airlines Co. has finalized a sale-leaseback transaction with Babcock & Brown Aircraft Management (BBAM) involving 36 Boeing 737-800 aircraft. This significant move is part of Southwest's multi-year fleet monetization strategy, which is expected to lower the company's cost per available seat mile for the fourth quarter and the full year of 2024. The lease terms for the aircraft will range from 26 to 37 months, with Southwest expecting aircraft ownership costs to increase by approximately $2.6 million per aircraft annually.
The International Air Transport Association (IATA) recently reported a 20% drop in Brent crude oil prices over the last year, which is expected to reduce fuel costs, a major expense for airlines, and boost net profits. In line with this, Bernstein has maintained a neutral stance on Southwest Airlines Co., despite the company's ongoing efforts to enhance its operations. The research firm has increased the stock's price target from $30.00 to $33.00, citing early positive impacts of the plan.
Morgan Stanley (NYSE:MS) has resumed coverage on Southwest Airlines Co., assigning the stock an Overweight rating and setting a price target of $42.00. The firm's forecast is based on Southwest's long-term average price-to-earnings ratio and the successful implementation of the airline's plan, coupled with its historical strengths.
The airline industry, particularly American Airlines Group (NASDAQ:AAL) Inc. and Southwest Airlines Co., has provided positive updates, outperforming other sectors recently. However, Goldman Sachs (NYSE:GS) has reiterated its Sell rating on Southwest Airlines Co., maintaining the price target at $28.00.
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