On Monday, Citi maintained its Neutral rating on Southwest Airlines (NYSE:LUV) with a steady price target of $31.50. The firm's analysis included several forecast adjustments for the airline, taking into account an anticipated increase in revenue per available seat mile (RASM), a reduction in expected fuel costs, and the integration of third-quarter 2024 results into their financial model.
Citi's revised earnings per share (EPS) estimates for Southwest have been adjusted to $0.78 for the current year, from an initial forecast of $0.86. The projections for the following years have also been altered, with the EPS estimate for next year increasing to $2.03 from $1.87 and the 2026 estimate moving up to $2.65 from $2.51.
The adjustments reflect a more favorable outlook for Southwest's earnings before interest, taxes, depreciation, and amortization (EBITDA) and overall earnings. Despite these positive revisions, Citi has decided to keep the price target for Southwest Airlines shares unchanged. This decision is attributed to a reduction in the target enterprise value to EBITDA (EV/EBITDA) multiple, which has been lowered from 6.75 times to 6 times.
The firm's stance on the stock reflects a cautious optimism, acknowledging improved financial metrics while also recalibrating valuation multiples. Citi's analysis suggests that while the airline's operational performance may be on an upward trajectory, the current valuation already reflects these improvements.
In other recent news, Southwest Airlines Co. has reported record operating revenues of nearly $7 billion in Q3 2024, despite facing operational challenges such as recent hurricanes and a Boeing (NYSE:BA) strike.
The company maintains its confidence in achieving its long-term financial targets, including a return on invested capital of at least 15% by 2027, as disclosed during the earnings call. In terms of strategic moves, Southwest has terminated its common stock purchase rights, a development disclosed in a recent 8-K filing with the Securities and Exchange Commission.
TD Cowen has reaffirmed its Hold rating on Southwest shares with a steady price target of $25.00, reflecting a cautious optimism about the company's future prospects, especially following the recent settlement with an activist investor. The firm's analysis suggests that Southwest's growth rate may slow down, leading to a compression of the multiple used to determine the airline's valuation.
These are recent developments that investors in Southwest Airlines Co. should consider.
InvestingPro Insights
Recent data from InvestingPro adds depth to Citi's analysis of Southwest Airlines. The company's market capitalization stands at $17.63 billion, with a revenue of $27.38 billion over the last twelve months as of Q3 2024. This represents a revenue growth of 7.61% during the same period, indicating steady expansion in line with Citi's positive RASM expectations.
InvestingPro Tips highlight that Southwest is a prominent player in the Passenger Airlines industry, which aligns with its significant market presence. Additionally, 7 analysts have revised their earnings upwards for the upcoming period, supporting Citi's improved EPS estimates for future years.
However, it's worth noting that Southwest's P/E ratio (adjusted) for the last twelve months as of Q3 2024 is 39.31, which could be considered high for the airline industry. This valuation metric may explain Citi's decision to maintain a Neutral rating despite improved earnings forecasts.
For investors seeking a more comprehensive analysis, InvestingPro offers 6 additional tips that could provide further insights into Southwest Airlines' financial health and market position.
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