On Wednesday, Southwest Airlines Co. (NYSE:LUV) received an updated stock rating from Jefferies, moving from Underperform to Hold, accompanied by an increase in the price target to $28.00, up from the previous $20.00. The revision comes after Southwest's shares experienced a significant drop the day before.
The adjustment in rating and price target is a response to Southwest's recent performance and market conditions. The analyst noted that the previous day's 15% decline in the airline's stock price could represent a stabilization point. The commentary highlighted skepticism regarding the initial ambitious revenue per available seat mile (RASM) projections for 2024, which suggested a potential overestimation of demand.
The reduction in the number of Boeing (NYSE:BA) 737 MAX aircraft is expected to impact available seat miles (ASMs) by 1 to 1.5 percentage points. However, this is somewhat mitigated outside the peak summer season. Southwest's cost per available seat mile excluding fuel (CASM-ex) is projected to rise by 7.7%, slightly higher than previous estimates of 6-7%. This is partly due to the airline's strategy of adjusting its hiring to manage costs.
The analyst also pointed out that Southwest's free cash flow (FCF) is anticipated to improve. The valuation of Southwest's shares at 5.4 times its projected 2025 earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR) of $3.1 billion supports the new $28 price target. This valuation is considered to be at a 60% discount compared to the S&P 500, aligning with the three-year average.
The update from Jefferies reflects a revised outlook on Southwest's financial health and market position, suggesting a more neutral stance on the stock's investment potential at the current time.
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