Southwest Airlines Has 21% Upside Potential, Argus Says In Upgrade

Southwest Airlines Co (NYSE: LUV) reported forecast-beating second-quarter results July 26, and an Argus analyst said Friday that the airline's fortunes will only improve from here. 

The Analyst

Analyst John Staszak upgraded Southwest Airlines from Hold to Buy and set a price target of $73, suggesting 21-percent upside from current levels when the company's dividend is taken into consideration. 

The Thesis

Southwest Airlines is likely to benefit from the recent improvement in domestic airline fares and the prospects for stronger revenue per available seat mile, a measure of profitability, Staszak said in the upgrade note. (See his track record here.)

The analyst projects that Q3 RASM will reach the top end of the company's guidance range of down 1 percent to up 1 percent, with the metric accelerating to 2.5-percent growth in Q4 due to carefully managed capacity and a new reservation system.

Revenue should get a shot in the arm from "the sale of boarding slots, improvement in the frequent-flier program, a new reservation system and a new credit card agreement with Chase," Staszak said. 

Argus expects above-peer average revenue growth in the long run on the basis of Southwest's "simple fare structure and reputation for generally good customer service," the analyst said. 

Argus raised its EPS estimate for 2018 from $4.50 to $4.52 and for 2019 from $5.10 to $5.15, citing accelerating revenue growth and positive earnings surprises over the past five years.

The Price Action

Southwest Airlines shares have lost about 6 percent year-to-date. The stock was up 1.7 percent at $62.07 at the time of publication Friday.

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