Southwest Airlines upgraded at Argus Research on improved company prospects

Southwest Airlines (NYSE:LUV) Tuesday was upgraded to Buy from Hold by Argus Research, which noted an improvement in the low-cost carrier's outlook over the past several months, with Southwest and other airlines opting to limit capacity growth following a post-pandemic spike.

“We expect less rapid capacity growth in 2024 to benefit Southwest’s revenue per available seat mile (RASM), and to result in better-than-expected earnings,” noted Argus, which set a price target of $40 on the stock.

The brokerage raised its 2024 EPS estimate to $2.40 from $2.00, reflecting increased load factors and prospects for higher operating margins. Argus further increased its 2025 estimate to $2.80 per share from $2.50.

The Dallas-based Southwest sunk over 10% on Tuesday as the company tweaked its first-quarter guidance, including a downward adjustment in its Revenue per Available Seat Mile (RASM) outlook.

Southwest, which mainly files Boeing's (BA) 737s, also faced uncertainties from the plane-maker's ongoing challenges, that was likely to lead to a one-point reduction in Southwest's FY2024 capacity plans on a Y/Y basis.

Argus said it is maintaining a long-term BUY rating on LUV noting the company's record of above-peer-average revenue growth, driven by a simple fare structure and reputation for generally good customer service.

Seeking Alpha's Quant ratings recommended LUV as a Buy, eyeing potential in its profitability and growth. Meanwhile, about 11 of the sell-side analysts surveyed in the last 90 days rated the company as a Hold. This compares with four that rated it a Buy or higher and six that marked it a Sell or lower.

Since the start of the year, Southwest shares have remained largely unmoved. But on a 12-month reading, its stock has dipped about 7.12%.