We are downgrading our recommendation on
) to Underperform as the company is not expected to report profits
in the first quarter this year. The company reported lower
year-over-year earnings in the fourth quarter but outpaced the
Zacks Consensus Estimate.
Although Southwest is poised to benefit from fleet rightsizing, its
Evolve retrofit program, steady capacity growth, All-New Rapid
Rewards, AirTran merger synergies and several ancillary revenues,
fuel prices continue to drag down the profits. The entire airline
industry is currently struggling with higher fuel prices and a
slow-moving U.S. economy.
Additionally, high maintenance costs associated with fleet
modernization, new advertising rules, risks pertaining to the
AirTran integration, heavy investments and reliance on a single
fleet keep us cautious on the stock. Hence, we rate the stock
Underperform with a target price of $7.50, based on 11x our
earnings estimate for 2012.
SOUTHWEST AIR (
): Free Stock Analysis Report
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