Southwest shares target lifted by Susquehanna shares on new initiatives

Susquehanna has increased the price target for Southwest Airlines Co. (NYSE: NYSE:LUV) to $30, up from the previous $25, while maintaining a Neutral rating on the stock.

The firm acknowledged the airline's recent enterprise initiative, "Southwest. Even Better." as a step in the right direction, signaling a willingness to heed investor input and undertake thorough analysis.

The analyst at Susquehanna believes that for Southwest to achieve its operating margin goals by the fiscal year 2027, several factors must align, including achieving at least high-single-digit revenue per available seat mile (RASM) on a likely mid-single-digit cost per available seat mile excluding fuel (CASM-ex) base for the fiscal year 2025. In light of the new guidance, Susquehanna has set quarterly estimates for the fiscal year 2025 and annual estimates for the fiscal year 2026.

For the fiscal year 2025, Susquehanna forecasts available seat miles (ASMs) to increase by 1.5%, which is within the company's guidance of 1-2% and below the consensus of 2%. CASM-ex is projected to rise by 5%, which is higher than the consensus of 3.1%, and total revenue per available seat mile (TRASM) is expected to grow by 3.1%, slightly below the consensus of 3.7%.

Looking ahead to the fiscal year 2026, the base case anticipates ASMs to also grow by 1.5%, with CASM-ex increasing by 3.5% and TRASM by 3.6%, both figures surpassing the consensus estimates.

The upward adjustment in the price target reflects a change in the valuation multiples, with EBITDAR and P/E multiples each being raised by one turn to 7x and 19.5x, respectively. This revision is based on an anticipated extended recovery in earnings for Southwest, as the enterprise initiative is expected to take time to fully materialize, including customer adoption of revenue initiatives and potential market share losses to other U.S. carriers.

In other recent news, Southwest Airlines shares were upgraded to Hold by Jefferies, with a new price target of $32. This revised outlook comes in light of Southwest's potential to achieve about half of its $4 billion goal in incremental EBIT by 2027.

TD Cowen has also maintained its Hold rating on the company, projecting higher than consensus earnings per share (EPS) for the third quarter and revenue per available seat mile (RASM) and cost per available seat mile excluding fuel (CASMex) for the fourth quarter.

In addition to these analyst ratings, Southwest has announced a $2.5 billion share repurchase program and ambitious targets for 2027. The company plans to limit its annual capacity growth to between 1% and 2% over the next three years. Furthermore, Director Rakesh Gangwal has shown confidence in Southwest's direction by investing over $100 million in company shares.

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 Susquehanna's analysis, recent data from InvestingPro provides additional context for Southwest Airlines' financial position. The company's market capitalization stands at $18.38 billion, reflecting its significant presence in the Passenger Airlines industry. Despite the challenges highlighted in the article, InvestingPro Tips indicate that Southwest holds more cash than debt on its balance sheet, which could provide financial flexibility as it implements its "Southwest. Even Better." initiative.

However, investors should note that Southwest is currently trading at a high P/E ratio of 234.66, suggesting that the market may be pricing in future growth expectations. This aligns with the InvestingPro Tip that the company is trading at a high earnings multiple. On a more positive note, analysts predict that Southwest will be profitable this year, which could support the company's efforts to achieve its operating margin goals by fiscal year 2027, as discussed in the article.

For those seeking a deeper understanding of Southwest's financial outlook, InvestingPro offers 5 additional tips that could provide valuable insights into the company's performance and market position. These tips, along with real-time financial metrics, can help investors make more informed decisions as they evaluate Southwest's potential in light of its new enterprise initiatives and market challenges.

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