Why Argus Sees Southwest Flying Even Higher

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Southwest Airlines Co. (NYSE: LUV) watched its shares hit an all-time high in Thursday’s session on continued momentum and lower operating costs. In just the past year, the stock is up over 50%, versus a 16% gain in the S&P 500. As a result, one key independent research firm took this opportunity to weigh in on Southwest and whether the stock can fly even higher.

Earlier this month, Southwest reported traffic data for the month of May. The company flew 11.2 billion revenue passenger miles (RPMs) in May 2017, up 3.4% year over year. Available seat miles (ASMs) increased 4% to 13.2 billion in May 2017. The May 2017 load factor was 85.4%, compared with 85.8% in May 2016. Management continues to expect second quarter operating revenue per ASM (RASM) to rise 1% to 2%, compared to the first quarter of 2016.

Also Southwest projects 2017 available seat mile growth of 3.5%, with 5.0% growth in the second quarter. Excluding fuel expense, profit-sharing costs and special items, management expects second-quarter unit costs to increase 6%. The higher costs include increased compensation for flight attendants and pilots.

On the other hand, Argus expects Southwest to have $3.77 in earnings per share (EPS) in 2017, and $4.33 in EPS in 2018. The firm also raised Southwest to a Buy rating from Hold with a price target of $68, implying an upside of 11% from Wednesday’s closing price $61.03.

Argus gave its investment thesis as:

This well-managed company continues to develop strategies that deliver growth. Recently, management has taken steps to lower nonfuel operating costs and has been creative in generating additional sources of revenue. In addition, the company has expanded its service and recently implemented a $500 million reservation system. Southwest expects that by 2020, the improved system will generate about $500 million in additional earnings. The balance sheet is clean, and the company has an impressive record of returning capital to shareholders through dividends and share buybacks. The shares are priced slightly higher than the peer group, but we think the premium is deserved given high levels of profitability and market performance. Our target price of $68 implies potential upside, including the dividend, of about 13% from current levels.

Shares of Southwest were last seen up 0.6% at $61.40 on Thursday, with a consensus analyst price target of $66.13 and a 52-week range of $35.42 to $62.29.