Citi raises Southwest stock price target to $30, retains Sell rating

On Friday, Citi analyst Stephen Trent (NSE:TREN) increased the price target on Southwest Airlines Co. (NYSE:LUV) to $30.00, up from the previous $27.00. Despite this adjustment, the firm maintained a Sell rating on the airline’s shares. According to InvestingPro data, Southwest currently trades at a P/E ratio of 43.9x, suggesting a relatively high valuation multiple compared to industry peers. The stock has shown resilience with a 19% return over the past year. Trent acknowledged Southwest’s efforts to cut costs through strategic initiatives, including a reduction in managerial headcount, which could potentially lower its seat mile costs.

Trent’s analysis pointed out uncertainties surrounding the effectiveness of Southwest’s ongoing investments in technology and other areas to overcome past operational challenges. He expressed skepticism regarding the airline’s projected earnings improvements during what is anticipated to be an atypical cycle in 2025, suggesting that the current guidance might be overly optimistic. InvestingPro analysis reveals that three analysts have recently revised their earnings downward for the upcoming period, though the company maintains a solid balance sheet with more cash than debt.

The airline’s restructuring efforts have been recognized by Citi, but Trent indicated that fully endorsing the projected benefits of these changes is difficult. He remarked, "While we give Southwest some credit for its recent restructuring, giving them full credit seems very hard to defend."

The price target adjustment reflects a nuanced view of Southwest’s potential to manage costs and improve operations while also considering broader industry and economic factors that may impact the airline’s performance in the near future.

Southwest, like other airlines, has been navigating a complex landscape of fluctuating demand, regulatory changes, and evolving consumer expectations. As a prominent player in the Passenger Airlines industry, the company’s stock price will continue to be influenced by its ability to execute its strategic plans effectively and adapt to the dynamic aviation market. With an EBITDA of $1.67 billion in the last twelve months and revenue growth of 5.3%, Southwest maintains its position as a significant industry player.

In other recent news, Southwest Airlines has faced a notable incident where a flight was aborted at Orlando International Airport due to runway confusion. The Federal Aviation Administration is currently investigating the situation. On the financial front, Melius Research upgraded Southwest Airlines’ stock rating from "Sell" to "Hold," raising the price target to $34, citing improvements in the company’s operational strategies. UBS also upgraded the stock from "Sell" to "Neutral," increasing the target price to $36, reflecting optimism about the airline’s strategic changes and potential for margin improvement. Meanwhile, Bernstein maintained a "Market Perform" rating with a price target of $33, noting that Southwest’s recent introduction of baggage fees and other operational changes could drive significant earnings before interest and taxes in 2025. However, Southwest has lowered its unit revenue guidance for the first quarter, attributing this to factors such as a higher completion factor and reduced government travel. Additionally, in a strategic shift, Southwest will begin charging for certain checked luggage, ending a long-standing free-bag policy. These recent developments highlight the company’s efforts to adjust its business model and improve financial outcomes amidst challenging industry conditions.

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