On Wednesday, Morgan Stanley (NYSE:MS) resumed coverage on Southwest Airlines Co. (NYSE:NYSE:LUV), assigning the stock an Overweight rating and setting a price target of $42.00.
"fter playing defense for much of the time since the pandemic, mgmt. is now on offense with a series of revenue and cost initiatives in the pipeline to restore normalized earnings power back in the $3-4 range by 2027," Morgan Stanley said in its note.
Morgan Stanley's forecast is based on applying Southwest's long-term average price-to-earnings (PE) ratio of approximately 12-13 times to the higher end of the projected earnings range, which suggests a potential mid-$40s stock price.
The firm also suggests that successful implementation of the airline's plan, coupled with its historical strengths, such as a net cash balance sheet, could justify a higher mid-teens PE multiple over time.
The analyst's commentary indicates that if domestic air travel undergoes a mean reversion by 2025, Southwest could set a benchmark for the industry, including its domestic competitors who are also in the process of turning their businesses around. The airline's strategic efforts are seen as a potential indicator of the direction in which the industry could head.
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