Investing.com -- Citi downgraded Southwest Airlines (NYSE:LUV) Co. to "Sell" from "Neutral" on declining earnings quality and weaker cash flow conversion compared to pre-pandemic levels. The brokerage also reduced its price target to $29.50 from $31.50.
“As US network airlines enjoy positive earnings quality and FCF trajectories, these carriers have overtaken Southwest on these fronts,” analyst said.
“In spite of this shift, Southwest now trades at a bigger P/E premium to this group than it did pre-COVID.” Southwest trades at a 135% premium to these peers, up from 50% pre-COVID.
Southwest's pre-tax margins have fallen below those of domestic network peers like Delta and United, which benefit from premium cabin momentum and robust co-branded card revenues.
Citi noted that Southwest's EBIT-to-FCF conversion has deteriorated, partly due to sale-leaseback activities and competitive pressures. The airline faces challenges penetrating the premium travel segment, which could limit growth.
While Citi acknowledged potential upside if Southwest improves its premium passenger base or offsets sector-wide cost pressures, it remains skeptical given current dynamics.