Raymond James Raises Southwest Airlines Price Target, With Cost Concerns Dispelled

Southwest Airlines Co LUV reported better-than-expected Q4 results last week that were backed by its own revenue initiatives, and the airline has set aggressive targets for both revenue per available seat mile and cost capping, according to Raymond James.

The Analyst

Analyst Savanthi Syth maintains an Outperform rating on Southwest Airlines, while raising the price target from $60 to $64.

The Thesis

Southwest Airlines has capped its 2019 cost per available seat mile excluding fuel and profit sharing at 3-3.5 percent, Syth said in a Friday note.

The cost burden is likely to be in the first half of the year, given fleet underutilization arising from the termination of the Hawaii service, timing of deliveries and maintenance sequencing, the analyst said. 

Southwest Airlines guided to 4-5-percent year-on-year growth in RASM revenue per available seat mile for Q1, which beat even the more optimistic estimates.

The company will enjoy easy RASM comps in the first half of 2019, Syth said. Yet uncertainty around the Hawaii launch may impact Q2 revenues and costs, she said. 

Despite these short-term uncertainties, Southwest Airlines has the ability to maintain superior margins, FCFs and low leverage in the longer-term, the analyst said.

The company is also poised to benefit from “capitalizing on technology catch-up and international growth opportunities,” Syth said. 

Price Action

Southwest Airlines shares were trading up 1.13 percent at $55.60 at the time of publication Monday. 

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