Barclays has reaffirmed its Equalweight rating and $27.00 price target for Southwest Airlines (NYSE: NYSE:LUV).
The focus is now on the upcoming investor day, where the management is expected to present its revamped commercial strategy in response to the profit gap compared to competitors.
Southwest's investor day, scheduled for later this week, is anticipated to be a pivotal event as the airline's leadership team faces pressure from activist investor Elliott, who is pushing for a board and CEO overhaul.
The current CEO Bob Jordan and his team have announced plans for significant changes to the Southwest Airlines product, including seat assignments, premium seating options, and other potential enhancements.
In addition to product changes, the management team is expected to address network priorities, acknowledging slower growth prospects and the performance of recent expansions, such as in Hawaii, where yields are significantly below the system average.
The discussion will also likely cover the potential for increased efficiency, particularly in light of the ongoing Boeing (NYSE:BA) 737 MAX delivery delays.
The report also notes that Southwest has experienced non-fuel unit cost inflation above that of large network airline competitors since the pandemic, as the carrier adjusted labor contracts to market rates. This has positioned Southwest as a relatively high-cost carrier, necessitating a structural overhaul to enhance revenue production.
In other recent news, Southwest Airlines has been in the spotlight due to a series of strategic adjustments and significant changes in leadership. Amidst ongoing tension with activist investor Elliott Investment Management, the airline has been critiqued for its governance practices. The financial firm Bernstein has maintained its Market Perform rating on Southwest, despite these challenges.
Elliott Investment Management has been vocal about its dissatisfaction with the current state of affairs at Southwest, even announcing plans for a special meeting to discuss a leadership overhaul. The firm has proposed the appointment of new independent directors with expertise in airlines, customer experience, and technology. On the other hand, Southwest has shown support for its CEO, Bob Jordan, and is planning to appoint four new independent directors.
In response to the pressures from Elliott, Southwest Airlines is undergoing significant changes in its business strategy. The airline is introducing assigned seating, overnight flights, and altering flight routes and schedules. These changes aim to modernize the airline's operations and improve its financial performance.
On the analyst front, TD Cowen and Citi have maintained neutral ratings on Southwest, while Evercore ISI upgraded the airline's stock to Outperform, citing the company's new revenue initiatives and shift towards capacity discipline.
InvestingPro Insights
As Southwest Airlines (NYSE:LUV) prepares for its significant investor day, there are a few key insights from InvestingPro that may shape investor expectations. Notably, Southwest Airlines holds more cash than debt on its balance sheet, which could provide some financial flexibility as they implement their new commercial strategy. Additionally, four analysts have revised their earnings upwards for the upcoming period, indicating a positive outlook on the company's profitability.
From a valuation perspective, the company is trading at a high earnings multiple with a P/E ratio of 228.02, which has adjusted to 32.4 for the last twelve months as of Q2 2024. This suggests that the market has high expectations for the airline's future earnings potential. Revenue growth has been steady, with a 7.54% increase over the last twelve months as of Q2 2024, though the EBITDA growth has seen a slight decline of -2.97% in the same period.
Investors considering Southwest's stock will also find it interesting that the company has a dividend yield of 2.42% as of the most recent data, with a fair value estimation by InvestingPro at $27.25, which is slightly above Barclays' price target of $27.00. These metrics and insights, including additional InvestingPro Tips available on the platform, could provide a more nuanced understanding of Southwest's financial health and future prospects as the airline presents its revamped strategy to stakeholders.
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