We are upgrading our recommendation on
Southwest Airlines Co.
) to Outperform based on falling fuel prices and strong growth
opportunities. The company reported lower year-over-year earnings
in the first quarter but outpaced the Zacks Consensus Estimate.
Fuel prices, the major threat to the company's profitability, have
dropped, which has made airline operations less expensive.
This lower cost, along with the cost-cutting measures, would offset
high maintenance costs associated with the fleet modernization
program amid the ongoing market turmoil. Additionally, Southwest is
poised to benefit from fleet rightsizing, the Evolve retrofit
program, steady capacity growth, All-New Rapid Rewards and several
The AirTran merger will also provide additional synergies when
integrated with the company's livery, starting this year. Hence, we
have an Outperform rating with a target price of $11, based on
13.75x our earnings estimate for 2012.
SOUTHWEST AIR (LUV): Free Stock Analysis Report
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