Imperial Capital Starts Southwest (LUV) at Outperform
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Imperial Capital initiates coverage on Southwest (NYSE: LUV) with a Outperform rating and a price target of $46.00.
Analyst Michael Derchin commented, "LUV has been profitable for 43 consecutive years, a remarkable achievement for any company, but for a cyclical airline, it is a virtually unparalleled achievement, in our view. The cornerstone of LUV's success has been its focus on cost control and productivity, which has enabled LUV to offer customers a unique value proposition -- low fares, bags fly free, and no change fees. Recently, the sustainability of LUV's business model has been questioned by investors following a tentative pilots’ agreement, which reportedly boosts pilots’ pay by 29% over seven years. With flight attendant and mechanics’ contracts in negotiations, we have observed that investors are asking whether labor is about to “kill the goose that laid the golden eggs." LUV is likely to maintain a meaningful competitive cost advantage, in our view, due to its high frequency, point-to-point model that maximizes the productivity of assets -- planes, gates, and people -- a single aircraft type, fleet modernization, and increases in average seats per aircraft."
"However, LUV shares are trading consistent with the Big 3 (United Airlines [UAL], American Airlines [AAL], and Delta Air Lines [DAL]) as investors are concerned that its cost gap will erode over time. We believe these concerns are overblown and LUV can still maintain a meaningful cost and margin advantage because of its low cost business model, and warrants a premium to the Big 3."
Shares of Southwest closed at $38.76 yesterday.
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