UBS lifts Southwest stock rating, raises target to $36 from $29

On Thursday, UBS analyst Thomas Wadewitz upgraded Southwest Airlines Co. (NYSE:LUV) stock from Sell to Neutral and increased the price target to $36.00, up from the previous $29.00. The stock, currently trading at $33.60, has shown strong momentum with an 8.4% gain over the past week. According to InvestingPro, Southwest maintains a market capitalization of $19.9 billion and has demonstrated profitability over the last twelve months. The revision reflects a positive outlook on the company’s financial performance, which is expected to benefit from recent strategic changes despite a challenging industry environment.

Wadewitz’s optimism stems from Southwest’s proactive measures, such as the introduction of fees for checked bags, which signal a committed stance to enhance financial results. This "whatever it takes" approach is anticipated to lead to margin improvement and higher earnings per share (EPS). The airline currently maintains a gross profit margin of 21.3% and generates annual revenue of $27.5 billion. For deeper insights into Southwest’s financial health and growth potential, InvestingPro offers 8 additional key tips and comprehensive analysis in its Pro Research Report.

The analyst has adjusted the earnings forecast for Southwest, raising the 2025 EPS estimate to $1.68 from $1.54, and the 2026 EPS projection to $2.55 from $2.10. The upgraded financial estimates align with the belief that the airline’s aggressive revenue and cost management strategies are appropriate steps toward growth.

The price target adjustment to $36 is supported by a "what’s priced in" analysis, which indicates that the market is currently factoring in an EPS of approximately $2.40 for the fiscal year 2026. This analysis suggests that the increased target price is based on the expected financial improvements and market expectations.

Wadewitz acknowledges that while the pursuit of higher financial performance is commendable, it does come with heightened execution risks. Nonetheless, the overall assessment is that the benefits of Southwest’s assertive policy changes outweigh the potential drawbacks, justifying the upgrade to a Neutral rating.

In other recent news, Southwest Airlines has introduced significant operational changes, including the addition of baggage fees and basic economy fares, while discontinuing its fuel hedging strategy. These updates are expected to drive an EBIT of $1.7 billion for fiscal year 2025, surpassing the previous analyst forecast of approximately $1 billion. Additionally, the airline has adjusted its unit revenue guidance for the first quarter downward, citing factors such as a higher-than-anticipated completion factor and reduced government travel. In a strategic pivot, Southwest Airlines will also commence charging passengers for certain checked luggage, marking the end of a longstanding free-bag policy.

Southwest Airlines has also announced changes to its customer loyalty program and fee structure, effective for flights booked from May 28, 2025. These changes include modifications to the baggage policy and earning rates for Rapid Rewards points. In corporate developments, Southwest has amended its agreement with investment firm Elliott Management, allowing Elliott to increase its economic exposure in the airline. This amendment also extends restrictions on Elliott acquiring more than 12.49% of Southwest’s outstanding common stock until April 1, 2026.

Lastly, a Southwest Airlines plane narrowly avoided a potential collision at Chicago Midway International Airport, prompting an investigation by the US Federal Aviation Administration. The airline confirmed that safety procedures were followed and emphasized the importance of customer and employee safety.

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