Evercore ISI analyst Duane Pfennigwerth maintained a Hold rating on Southwest Airlines (LUV – Research Report) yesterday and set a price target of $35.00.
Duane Pfennigwerth has given his Hold rating due to a combination of factors affecting Southwest Airlines’ financial outlook and operational challenges. The revised guidance for the first quarter indicates that the initial unit revenue expectations were too optimistic, leading to a downward adjustment. Pfennigwerth points out that the early revenue guidance from the fourth quarter was significantly ahead of both historical trends and expectations, which did not appear to leave much room for error. Moreover, the sharp positive turn in investor sentiment driven by the initial guidance has had to contend with the reality of the revised outlook. Additionally, the variation in revenue outlook is not entirely unexpected given Southwest’s considerable domestic growth, which is ahead of the underlying macroeconomic trends as per Pfennigwerth’s analysis.
Further impacting the Hold rating is the ongoing issue with aircraft delivery delays. Southwest Airlines has had to adjust its capacity growth projections due to fewer aircraft deliveries than initially anticipated, specifically receiving fewer MAX 8s and no MAX 7s. This reduction in capacity growth leads to the need to reoptimize schedules and manage expectations accordingly. Furthermore, the revised first-quarter guidance reflects an increase in non-fuel unit costs and fuel per gallon costs, despite improved operational performance leading to a higher completion factor. Pfennigwerth believes that while the company is planning for a lower growth rate later in the year, which may lead to more stable revenue forecasts, the current adjustments and operational headwinds justify a Hold rating at this time.
In another report released today, Jefferies also upgraded the stock to a Hold with a $28.00 price target.
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Southwest Airlines (LUV) Company Description:
Southwest Airlines Co. is a passenger airline which provides scheduled air transportation in the United States and near-international markets. As of Dec. 31, 2020, the air carrier operated a total fleet of 718 Boeing 737 aircrafts and covered 107 destinations.
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