On Tuesday, UBS initiated coverage on Southwest Airlines Co. (NYSE:LUV) with a Buy rating and set a price target of $36.00. The firm highlighted a forecasted period of profit recovery for the airline, expected to begin later in 2024. The optimism for Southwest's financial prospects comes despite a recent decline in the company's stock value and a slower recovery in revenue per available seat mile (RASM), a key industry metric.
According to UBS, Southwest has experienced a significant de-risking following a 17% drop in its stock price last week. The firm anticipates a sequential improvement in RASM, projecting it to grow from a low single-digit percentage in the second quarter to a mid-single-digit percentage by the fourth quarter of 2024. This expected growth is attributed to Southwest's network optimization strategy, which is predicted to increase load factors, a measure of flight occupancy, and subsequently improve profit margins in the second half of 2024 and into 2025.
UBS's analysis indicates that the current stock price reflects an expectation of $2.76 billion in EBITDAR (earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs) for 2025. This figure falls short of UBS's own estimate of $3.64 billion. The firm's outlook suggests that the near-term risks for Southwest have been largely mitigated and that there is potential for significant profit growth in the latter half of the year.
The UBS report underscores the potential for Southwest Airlines to outperform expectations, with a positive risk-reward ratio moving forward. The airline's strategic efforts to optimize its network and improve load factors are key drivers behind UBS's positive rating and ambitious price target for the stock.
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