On Tuesday, Deutsche Bank upgraded shares of Southwest Airlines Co. (NYSE:LUV) from Hold to Buy, significantly increasing the price target from $28 to $42. The revision reflects a positive outlook on the company's potential for growth and operational efficiency.
The new price target is based on a projected 4x enterprise value to EBITDAR (earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs) multiple for the airline's 2024 forecast and a 3.5x multiple for 2025. This adjustment represents a slight increase in the multiples previously used by the bank. The analyst cites Southwest's status as the largest domestic low-fare carrier as a key factor in its ability to capitalize on network restructuring efforts, both its own and those of its competitors.
Southwest's operational performance has recently seen improvements due to strategic investments and initiatives aimed at enhancing reliability. These factors have contributed to the airline's resilience, as it has not faced the same aircraft grounding issues that have affected other carriers, such as those related to the MAX 9 and GTF-powered A320/321neos.
Despite the increase in the target multiple, it remains conservatively below the historical mid-cycle trading range for the airline's stock, which is typically between 6x and 8x forward EV/EBITDAR. The analyst's approach suggests caution, avoiding the debate on whether Southwest should command a premium multiple in the market. The new price target indicates confidence in the airline's future performance without assuming a premium valuation.
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