Evercore ISI maintains Southwest stock outperform rating

On Thursday, Evercore ISI upheld its Outperform rating and $40.00 price target for Southwest Airlines Co. (NYSE:LUV), following the company’s first-quarter performance. The airline, currently valued at $14.65 billion, reported a narrower-than-expected loss per share of $0.13, which was better than the predicted $0.23 by Evercore ISI and $0.18 by the consensus estimate. According to InvestingPro data, analysts’ price targets for Southwest range from $19 to $42, reflecting diverse market opinions about this prominent player in the Passenger Airlines industry. This outcome was attributed to lower non-fuel costs, which increased by 5% compared to the anticipated 6%, and higher unit revenue, which saw a 4% increase.

Southwest’s unit revenue benefited from yields that surpassed expectations, rising by 10% against the forecasted 3%, although this was somewhat offset by a lower load factor of 74%, which fell short of the expected 78%. The company’s total revenue stands at $27.48 billion for the last twelve months, with a revenue growth of 5.34%. InvestingPro analysis shows the company maintains strong financial fundamentals, holding more cash than debt on its balance sheet, though it’s currently trading at a relatively high P/E ratio of 32.67. The company’s domestic Revenue per Available Seat Mile (RASM) expanded and outperformed the decline in network carrier domestic RASM, despite Southwest’s lack of premium seating options and tighter capacity.

The airline’s total unit costs remained approximately flat year-over-year, with fuel costs per gallon down 15% and non-fuel unit costs up by 5%. The pre-tax margin showed year-over-year improvement, reaching -1.5% compared to -4% in the first quarter of 2024.

Evercore ISI pointed out the key question of how long it will take for improving trade conditions to stimulate activity and demand. Despite the softening core demand, Southwest could have exercised more caution with its mid-March guidance upgrade for the fiscal year. Nevertheless, the firm noted that Southwest’s tight capacity management appears to be well-suited for the current market conditions. The airline has several initiatives planned, detailed on page 2 of the report, expected to kick off and mature in the near future.

For the June quarter, Southwest anticipates a 2% decrease in unit revenue at the midpoint, which is slightly worse than Evercore ISI’s previous estimate of a 1% decline. Despite near-term challenges, InvestingPro data indicates net income is expected to grow this year, with analysts forecasting EPS of $1.60 for FY2025. For deeper insights into Southwest’s financial health and growth prospects, investors can access the comprehensive Pro Research Report, available exclusively to InvestingPro subscribers, covering over 1,400 top US stocks. The non-fuel unit cost is projected to increase by 3.5-5.5% on a 1-2% capacity growth, which is again a bit higher than the previously estimated 3% cost increase. The implied EBIT margin is around 4.5%, slightly lower than the prior estimate of 5%.

Southwest has chosen not to reiterate its full-year 2025 and 2026 EBIT guidance, which was previously set at $1.7 billion and $3.9 billion, respectively. However, the company still expects to achieve the same initiative contribution of $1.8 billion in 2025 and $4.3 billion in 2026. In response to the current demand, Southwest is reducing its capacity for the second half of the year, with expected full-year growth now at approximately 1%, which is aligned with Evercore ISI’s earlier estimate and below the prior guidance of 1-2% growth.

The earnings call is scheduled for tomorrow at 12:30 PM.

In other recent news, Southwest Airlines has been the focus of several noteworthy developments. Bernstein analysts have lowered their price target for Southwest from $33 to $27, citing concerns about the airline’s changing business model and its impact on consumer demand. Meanwhile, Fitch Ratings revised Southwest’s outlook from Stable to Negative, maintaining a ’BBB+’ rating but expressing concerns over the airline’s strategic changes, including the introduction of baggage fees. Citi analysts, while maintaining a Sell rating on Southwest, raised the stock’s price target to $30, acknowledging cost-cutting efforts but expressing skepticism about the airline’s projected earnings improvements.

Additionally, Southwest Airlines faced operational challenges when a flight at Orlando International Airport was aborted due to a runway confusion incident. The Federal Aviation Administration is investigating this occurrence. Southwest’s recent strategic initiatives, such as managerial headcount reduction, have been recognized, but analysts remain cautious about the company’s ability to navigate the current economic landscape. Investors are also looking forward to upcoming earnings reports from major airlines, which will provide further insights into the industry’s performance and future prospects.

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