On Friday, Goldman Sachs (NYSE:GS) resumed coverage on Southwest Airlines Co. (NYSE:LUV) with a Sell rating and set a price target of $28.00. The airline's shares have seen a 12% increase year-to-date, but this performance places it in the lower half compared to other U.S. airlines. The company's revenue growth has been identified as a factor affecting its stock price performance.
Southwest announced significant changes to its offerings throughout 2024, aiming to boost revenue through 2027. Notable updates include a new onboard experience featuring assigned seating and extra legroom. These enhancements are anticipated to contribute to the airline's revenue, with the majority of the benefits expected from the revamped seat product.
Despite the potential for increased revenue, Goldman Sachs points to risks involved with the implementation of these changes. While the firm acknowledges the likelihood of Southwest's success in rolling out the new features, it also notes the challenges the company may face in achieving its margin targets.
The Sell rating is primarily based on two factors: the current product lineup not being optimized to meet increasing premium demand in the short term, and the execution risks associated with the airline's financial goals.
Goldman Sachs suggests that the full-service carriers' capacity to compete across all demand segments may intensify competition for Southwest and its peers, potentially leading to lower normalized profitability than the airline has historically experienced.
In other recent news, Southwest Airlines has seen substantial leadership changes, with Rakesh Gangwal appointed as the independent chairperson of the board. This comes as part of a broader agreement with Elliott Investment Management, which resulted in five of Elliott's nominees, including Gregg Saretsky as the finance committee chair, being integrated into Southwest's board.
Alongside these leadership changes, Southwest reported record operating revenues of nearly $7 billion in Q3 2024. Analyst firms have responded to these developments, with BofA Securities resuming coverage on the company with a Neutral rating and a price target of $33.00. Citi and TD (TSX:TD) Cowen have also maintained their Neutral and Hold ratings respectively, adjusting their earnings per share estimates for the company.
In addition, Southwest terminated its common stock purchase rights, a move disclosed in a recent 8-K filing with the Securities and Exchange Commission, potentially signaling changes in corporate governance.
InvestingPro Insights
Recent InvestingPro data provides additional context to Goldman Sachs' analysis of Southwest Airlines (NYSE:LUV). Despite the challenges highlighted in the report, LUV's stock has shown a strong 22.9% return over the last three months, indicating some investor optimism. The company's market capitalization stands at $19.44 billion, reflecting its significant presence in the airline industry.
InvestingPro Tips reveal that Southwest is a prominent player in the Passenger Airlines industry, which aligns with the article's focus on the company's competitive positioning. Interestingly, while Goldman Sachs expresses concerns about revenue growth, InvestingPro data shows a 7.61% revenue growth over the last twelve months, with total revenue reaching $27.38 billion.
However, the company's profitability remains a concern, as highlighted by an InvestingPro Tip indicating that Southwest has not been profitable over the last twelve months. This observation supports Goldman Sachs' cautious stance on the company's ability to meet its margin targets.
For investors seeking a more comprehensive analysis, InvestingPro offers 5 additional tips that could provide further insights into Southwest Airlines' financial health and market position.
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