On Wednesday, Southwest Airlines Co. (NYSE:LUV) received an updated outlook from investment firm Jefferies, which raised its stock rating from Underperform to Hold. The firm also increased its price target for the airline's shares to $32.00, up from the previous target of $24.00.
The revision comes as the analyst acknowledged the potential for Southwest to achieve approximately half of its $4 billion goal in incremental EBIT by 2027. This projection is based on the anticipated growth of the US domestic market, which is expected to see a low-end long-term sustainable demand (LSD) increase in 2025.
The analyst's optimism is tempered by the challenges Southwest may face in implementing its assigned and paid EarlyBird Check-In (ELR) seats, which are set to take effect in the first half of 2026.
Despite these challenges, the revised price target reflects a more favorable risk-reward balance for Southwest over the next 12 months. The analyst's estimate for the airline's earnings per share (EPS) in 2027 stands at $2.50, which is below the company's implied range of $4 to $5 per share.
The new price target of $32 is based on a multiple of 6 times the company's projected EBITDAR (Earnings Before Interest, Taxes, Depreciation, Amortization, and Restructuring or Rent Costs).
The upgrade and new price target by Jefferies suggest a cautiously optimistic view of Southwest's financial prospects in the coming years, particularly as the airline strives to enhance its profitability amidst a growing domestic market.
In other recent news, Southwest Airlines has been the subject of several significant developments. The airline's third-quarter financial results are expected to align broadly with market consensus, according to TD (TSX:TD) Cowen, which has maintained its Hold rating on the company.
Southwest's adjusted earnings per share (EPS) for the third quarter revenue per available seat mile (RASM) and cost per available seat mile excluding fuel (CASMex) for the fourth quarter are projected to be higher than the consensus.
The company has also announced a $2.5 billion share repurchase program and ambitious targets for 2027. Despite uncertainties surrounding these goals, Evercore ISI upgraded Southwest's stock to Outperform, while Barclays (LON:BARC) maintained a positive rating. As a part of their strategy, Southwest plans to limit its annual capacity growth to between 1% and 2% over the next three years.
Meanwhile, Director Rakesh Gangwal demonstrated confidence in the firm's trajectory by investing over $100 million in company shares. This decision followed a significant reshuffling of Southwest's board, driven by demands from Elliott Investment Management for improved financial performance. Despite ongoing tension with Elliott, Gangwal opposes further leadership disruptions.
Elliott Investment Management, however, continues to express its lack of confidence in the airline's current leadership and has announced plans to call a special meeting to elect an independent Board of Directors.
Amid these developments, Southwest has increased its third-quarter RASM forecast by 3.5 percentage points and announced strategic initiatives to improve its financial performance and customer experience.
InvestingPro Insights
To complement Jefferies' updated outlook on Southwest Airlines Co. (NYSE:LUV), recent data from InvestingPro offers additional context for investors. As of the last twelve months ending Q2 2024, Southwest reported revenue of $27.03 billion, with a growth rate of 7.54%. This aligns with the analyst's expectations of market growth, supporting the potential for Southwest to achieve its incremental EBIT goals.
InvestingPro Tips highlight that Southwest holds more cash than debt on its balance sheet, which could provide financial flexibility as the airline implements new initiatives like the EarlyBird Check-In seats. Additionally, the company is expected to remain profitable this year, according to analyst predictions, which supports the more positive risk-reward assessment mentioned in the Jefferies report.
It's worth noting that Southwest's P/E Ratio (Adjusted) stands at 33.4, indicating that the stock is trading at a relatively high earnings multiple. This valuation metric may be important for investors to consider alongside the new price target of $32 set by Jefferies.
For those seeking a more comprehensive analysis, InvestingPro offers 5 additional tips for Southwest Airlines, providing deeper insights into the company's financial health and market position.
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