Southwest Airlines Co. (LUV) may have taken a nosedive since the start of the year that has grounded its stock price, but a number of analysts are telling investors to fasten their seatbelts and get ready for takeoff. While a fatal accident in mid-April that left one passenger dead, rising fuel costs, and signs of competition ramping up have all played a factor in pulling Southwest’s shares down by more than 22% this year, the stock now has potential to rise nearly 25%, according to Barron’s.
That stock’s hefty decline over the past six months represents a buying opportunity as bullish analysts still like the airline's predictable business model, not to mention the fact that it was the only major airline that maintained positive net income during the economic crisis. (To read more, see: Airline Stocks Are a Cheap Buy: Bernstein.)
An Airline That Trades Like an Industrial
Because of that predictable business model, many analysts prefer to value Southwest like an industrial stock, with a price-to-earnings multiple somewhere in the mid-teens rather than like most other airlines that trade somewhere around 10 times earnings or even less.
Currently trading at a forward multiple of 9.90, Cowen analyst Helane Becker thinks the stock deserves to be trading at 15 times earning, which implies a price target of $63. That’s an almost 24% upside from where its price was trading as of Tuesday's close.
Tapering Supply and Stronger Demand
Growing supply capacity has been a boon for the industry, but with rising fuel costs making it costly to fly unfilled planes, analysts are expecting that growth to taper by the end of the year. (To read more, see: United’s Growth Plan Sends Airline Stocks Into Tailspin).
But while the increase in supply means more intense competition, so far it has not yet translated into lower fares. In fact, fares are rising as the industry moves into the busy summer months. The ability to increase fares will help to alleviate the pressure of rising fuel costs. Southwest’s fuel cost hedges also help in that regard, according to Barron’s.
Along with higher demand over the summer months, the new corporate tax cuts will also give Southwest a bigger boost on tax savings than its competitors as it has historically paid more taxes compared to other airlines.