BofA’s Hartnett says concentrated U.S. stock returns are likely to persist
On Monday, Bernstein analysts adjusted their outlook on Southwest Airlines Co. (NYSE:LUV), reducing the price target from the previous $33.00 to $27.00. The stock, currently trading at $26.07 with a market capitalization of $15.49 billion, has seen its price fall nearly 23% in the past week. Despite the change, they have maintained a Market Perform rating on the airline's shares. According to InvestingPro data, technical indicators suggest the stock is in oversold territory.
The decision to lower the price target reflects concerns regarding Southwest's shifting business model, particularly as it faces a more challenging consumer demand environment. Bernstein analysts believe that the timing of these business model changes could be problematic, given the economic backdrop and the potential impact on the airline's traditionally value-seeking customer base. This sentiment is echoed by recent analyst activity, with InvestingPro data showing that 4 analysts have recently revised their earnings expectations downward for the upcoming period.
The analysts expressed caution about the potential negative effects on brand loyalty due to the introduction of baggage fees, which they see as a misalignment with the expectations of Southwest's customers. This, combined with the broader economic challenges, is viewed as a difficult setup for the airline.
Bernstein's new one-year price target of $27 is based on a capitalized next twelve months plus one (NTM+1) EBITDA estimate of $2.771 billion, down from the previous estimate of $3.625 billion. The valuation applies a multiple of 5.0 times to the EBITDA estimate, which remains unchanged. The firm also accounts for the value of net debt one year from now and adds proceeds from financing transactions related to Southwest's new sale-leaseback strategy. This strategy is a recent addition to Bernstein's valuation methodology. The discount rate used in the valuation remains steady at 15% on an annual contribution of $450 million from 2025 through 2027.
With the revised price target, Southwest's stock is now valued at 18.9 times the NTM+1 EPS estimate of $1.41, a significant increase from the previous multiple of 12.6 times based on the earlier EPS estimate of $2.58. Current InvestingPro analysis indicates the stock is trading below its Fair Value, suggesting potential upside opportunity despite near-term challenges. For deeper insights into Southwest's valuation and 12+ additional ProTips, including comprehensive financial health scores and peer comparison tools, explore the full Pro Research Report available on InvestingPro.
In other recent news, Delta Air Lines (NYSE:DAL) and United Airlines are set to release their first-quarter results, with Delta reporting on April 9, 2025, and United following on April 15, 2025. Investors are keenly awaiting management commentary on demand outlook, especially in light of the potential impact of tariffs and softening foreign demand for US flights. Meanwhile, Citi has reiterated its 'Buy' rating for United Airlines, Delta Air Lines, and American Airlines (NASDAQ:AAL), expressing confidence in their fundamental outlook despite ongoing market volatility. In contrast, Southwest Airlines has been the subject of various analyst updates.
Fitch Ratings has revised Southwest's outlook to negative, maintaining a 'BBB+' rating due to concerns over strategic changes like introducing bag fees, which could affect its competitive position. Citi, while raising Southwest's stock price target to $30, retains a 'Sell' rating, citing skepticism about the airline's projected earnings improvements. Melius Research, however, upgraded Southwest's stock from "Sell" to "Hold," increasing the price target to $34, reflecting optimism about the company's self-help initiatives and potential revenue performance improvements in 2025. Additionally, Southwest recently experienced an operational incident at Orlando International Airport, where a takeoff was aborted due to runway confusion, prompting an FAA investigation. These developments highlight the dynamic landscape in which these airlines operate, with varying analyst perspectives and operational challenges.
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