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Investing.com -- Evercore ISI has downgraded Southwest Airlines (NYSE:LUV) to In-Line from Outperform following a sharp year-to-date rally in the stock and rising valuation.
The firm cited “YTD outperformance and relative valuation expansion” as reasons for the change, noting that Southwest shares are now “much closer to fair value.”
Southwest stock is up 12% year-to-date, outpacing both the S&P 500 and its airline peers. It has rallied 19% in the last month.
“LUV is one of only two US Airlines up on the year,” analysts wrote, pointing to “14 turns of multiple expansion on ’25, the highest in our coverage by a wide margin.” In contrast, Delta is down 4%, United 8%, and American 29% over the same period.
While Evercore ISI still sees positive changes in progress, including efforts to recover lagging margins by the fourth quarter of 2025, the current valuation appears to reflect those improvements.
The firm believes the shares are “beginning to more fully price in clean execution of these initiatives into next year.”
Evercore also highlighted that 2025 consensus EPS has fallen from over $4 to just $1.08 today, despite the share price rally.
The firm questioned the sustainability of Southwest’s aggressive buyback program, which it views as a major driver of recent stock performance.
“At 1Q end, Southwest had completed $1b of its $2.5b share repurchase, with the intention of completing the remaining $1.5b by the end of July,” wrote the analysts.
Looking ahead, the firm acknowledged potential upside if the U.S. airline industry sees structural improvement or if Southwest’s upcoming product enhancements, such as assigned seating and extra legroom, boost revenue more than expected in 2026.