Southwest Airlines Recovery Pushed to 2025: Profitability Delayed, but Strong Balance Sheet Remains Intact, Analyst Says

Raymond James analyst Savanthi Syth downgraded the Southwest Airlines Co LUV stock from Strong Buy to Outperform and cut the price target on Southwest Airlines from $47 to $40.

On Thursday, the company reported second-quarter FY23 operating revenue growth of 4.6% year-over-year to $7.04 billion, beating the consensus of $6.98 billion. Adjusted EPS was $1.09, compared to $1.30 in 2Q22, missing the consensus of $1.10.

Also Read: How Southwest Airlines Fared In Q2?

The analyst's view that Southwest was done negatively surprising on CASM-Ex was incorrect, this time driven by additional market wage rate accruals (a more significant impact than we anticipated). 

Moreover, while Syth believed the schedule revamp to reflect post-pandemic changes in travel patterns is the right move, the benefits will not be evident for approximately six months. 

Hence, she found herself pushing out the recovery to 2019-level profitability from 2024 to 2025 until she gained greater conviction in the effectiveness of various initiatives. 

To be clear, she did not believe the Southwest model was broken and believed valuation should reflect its net cash position resulting in a balance sheet that is head and shoulders above most of the industry. 

Syth noted that the dividend yield is ~2% at the current share price.

TD Cowen analyst Helane Becker maintained Southwest Airlines with an Outperform and lowered the price target from $40 to $37.

Barclays analyst Brandon Oglenski maintained Southwest Airlines with an Equal-Weight and lowered the price target from $40 to $34.

Deutsche Bank analyst Michael Linenberg downgraded Southwest Airlines from Buy to Hold and lowered the price target from $52 to $38.

Price Action: LUV shares are trading higher by 0.70% at $33.25 on the last check Friday.