Hudson Has Buy On Southwest Airlines (LUV)

Hudson Securities has a Buy rating and a $17 price target on shares of Southwest Airlines LUV. In a note to clients, Hudson writes, "Even with LUV's recent fare increases, our EPS expectation for 1Q11 falls to $0.05 (from prior $0.12) on fuel. However, recent industry wide pricing power suggests more fare increases are on the way for LUV, which when combined with the AAI merger gives us the comfort to lift our 2H11 expectations and maintain our FY2011 EPS of $1.10. That is, by cutting AAI's most unprofitable flying, it shouldn't be too difficult for LUV to extract margin leverage. As background, our 2011 EPS had been factoring in roughly $0.10 accretion from the AAI merger, though given timing uncertainty, we pointed out that the accretion was admittedly difficult to model. We estimate total accretion at about $0.25/share post share count adjustment. Mgmt reports $400M in synergies should result in part from improving the RASM on AAI's network from connecting to LUV's system; cargo, ancillary revenue opportunities, and of course, cost savings. Even without an integrated workforce, LUV has a tremendous amount of raw network material to maintain revenues and lift margins in 2H11 which our updated model reflects." Shares of LUV are up 8 cents in early Friday trading to $12.87.