On Monday, BofA Securities announced the resumption of coverage on Southwest Airlines Co. (NYSE:LUV) with a Neutral rating and a price target set to $33.00. The airline, which has been in discussions with activist investor Elliott Management since June, has recently come to an agreement that led to board and management changes. This development follows a period where Southwest struggled to earn its cost of capital.
The analyst at BofA Securities noted that a broad set of initiatives, which were unveiled during an investor day in September, are now in motion. These initiatives include the implementation of assigned and premium seating, increased operational efficiency, and improved capital discipline. These changes are part of a strategic effort to enhance the airline's profitability and operational performance.
Despite the introduction of these self-help measures by Southwest, the analyst anticipates that it will take several years for the airline to fully realize the earnings uplift from these initiatives. The analyst's statement acknowledged the execution risk involved in these long-term plans and the current share prices, which are trading at the high end of their historical ranges.
The BofA Securities analyst's position reflects a cautious optimism, recognizing the potential for improvement while also considering the risks and challenges ahead for Southwest. The price objective of $33 indicates a belief in the airline's value, balanced against the uncertainties of the execution of its new strategies.
In other recent news, Southwest Airlines Co. has reported record operating revenues of nearly $7 billion in Q3 2024, despite operational challenges such as recent hurricanes and a Boeing (NYSE:BA) strike.
Citi and TD Cowen, both maintaining their Neutral and Hold ratings respectively, have adjusted their earnings per share (EPS) estimates for Southwest, factoring in the company's expected revenue growth and reduced fuel costs. Citi's revised EPS estimate for the airline is now $0.78 for the current year, while TD Cowen maintains a steady price target of $25.00.
In a strategic move, Southwest Airlines Co. terminated its common stock purchase rights, as disclosed in a recent 8-K filing with the Securities and Exchange Commission. This development could signify potential restructuring or changes in corporate governance.
Despite these changes and the challenges faced, the company remains confident in achieving its long-term financial targets, including a return on invested capital of at least 15% by 2027.
These are recent developments for Southwest Airlines Co. that investors should consider.
InvestingPro Insights
Recent data from InvestingPro adds context to BofA Securities' Neutral rating on Southwest Airlines (NYSE:LUV). The company's market cap stands at $18.36 billion, with a P/E ratio (adjusted) of 40.93 for the last twelve months as of Q3 2024. This relatively high valuation aligns with the analyst's observation that shares are trading at the upper end of historical ranges.
InvestingPro Tips highlight that Southwest holds more cash than debt on its balance sheet, which could provide financial flexibility as the airline implements its new initiatives. Additionally, 9 analysts have revised their earnings upwards for the upcoming period, suggesting growing confidence in the company's prospects. This optimism is further supported by the InvestingPro Tip indicating that analysts predict the company will be profitable this year, despite not being profitable over the last twelve months.
The company's strong return of 22.94% over the last three months, as reported by InvestingPro, may reflect positive market sentiment following the agreement with Elliott Management and the announcement of new strategic initiatives. However, investors should note that Southwest's short-term obligations exceed liquid assets, which could pose challenges as the company works to improve its operational efficiency and capital discipline.
For readers interested in a deeper analysis, InvestingPro offers 5 additional tips that could provide further insights into Southwest Airlines' financial health and market position.
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