Southwest Airlines Is 'Oversold,' Buckingham Says In Upgrade

Southwest Airlines Co LUV cautioned investors Wednesday it expects revenue for each seat it flies a mile (RASM) to come in flat for the first quarter, which marks a downtick from its prior guidance of up 1 to 2 percent. The stock lost nearly 5 percent and is now considered to be "oversold," according to Buckingham.

The Analyst

Buckingham Research Group's Daniel McKenzie upgraded Southwest Airlines' stock from Neutral to Buy with an unchanged $70 price target.

The Thesis

Southwest's disappointing RASM update could be attributed to multiple factors, McKenzie said in the research note. These include a more competitive fare environment than previously expected, lower than expected demand from spring break, and a sub-optimal schedule due to the 737 classic retirements.

To combat ongoing woes, Southwest oversaw various initiatives to improve its outlook, the analyst said. The company, for example, made adjustments to its schedules, introduced a system-wide fare increase and implemented a new state of the art revenue management system. As such, Southwest will be in a "much better" position to shift from revenue weakness in the first half of 2018 to one of revenue execution.

Southwest has returned $6.9 billion in cash to shareholders over the past five years, which represents 95 percent of its free cash flow. McKenzie said the company could "easily" announce another $2 billion share repurchase program on top of its already existing $1.35 billion authorization and also boost its dividend payout by 25 percent.

Bottom line, Southwest's stock is "oversold" at current levels and trading at a multiple comparable to some of its peers despite a superior profitability profile and capital return story.

Price Action

Southwest shares were trading higher by less than 1 percent at $58.

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