On Monday, Jefferies downgraded Southwest Airlines Co. (NYSE:LUV) stock from Hold to Underperform. The firm also adjusted the airline's price target to $20 from the previous $28. This move reflects growing skepticism about the company's financial prospects and strategic direction.
The downgrade comes in the wake of Southwest's first-quarter revenue per available seat mile (RASM) falling short of its already lowered guidance, which was revised just three weeks before the end of the quarter.
The analyst from Jefferies indicated that, contrary to management's expectations for revenue growth in the high single digits on a 4% increase in available seat miles (ASMs), there is no longer confidence in significant RASM improvement. This is particularly notable given that pricing was up over 3 points, yet remained flat in the first quarter.
Southwest is currently reassessing its forward-looking strategy as attempts at optimization appear to be unsuccessful. The analysis by Jefferies suggests that Southwest may lose its net cash position by 2025 and could approach a minimum cash threshold of $6 billion by 2026. Such a scenario would put the airline's dividend yield of 2.7% at risk.
The analyst's statement highlighted the challenges faced by Southwest, expressing a cautious outlook for the airline's financial health and dividend sustainability. The revised price target of $20 reflects these concerns and the anticipated pressures on the company's performance.
InvestingPro Insights
In light of Jefferies' recent downgrade of Southwest Airlines Co. (NYSE:LUV), examining the company through the lens of InvestingPro data and insights provides additional context for investors. The airline holds a market capitalization of $16.18 billion and is trading at a high earnings multiple with a P/E ratio of 42.08, which adjusts to 18.66 when considering the last twelve months as of Q1 2024. This suggests a valuation premium compared to historical earnings.
One of the key InvestingPro Tips highlights that Southwest Airlines has more cash than debt on its balance sheet, which could provide a cushion against financial headwinds. However, it's important to note that 11 analysts have revised their earnings expectations downwards for the upcoming period, signaling potential concerns about the company's future profitability. Moreover, despite a 7.6% revenue growth over the last twelve months as of Q1 2024, the stock has recently taken a significant hit, with a one-week price total return of -9.08%.
For investors seeking a deeper dive into Southwest's financials and strategic positioning within the Passenger Airlines industry, there are additional InvestingPro Tips available. These can provide further insight into the company's performance and outlook. For those interested in accessing the full range of insights, use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription at InvestingPro.
Overall, while Southwest is anticipated to remain profitable this year, the combination of analyst revisions and recent stock performance suggests that investors should monitor the company's strategic initiatives and financial results closely.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.