Southwest Airlines Stock: More LUV After Positive News And Share Repurchase Announcement?

Summary:

• Southwest Airlines raised its Q4 revenue outlook due to strong demand and better revenue management, but increased fuel costs may impact earnings.
• An accelerated $750 million share repurchase program aims to generate value, but Southwest still lags behind peers in operational performance.
• Despite a 16.5% upward revision in EBITDA and reduced CapEx, the stock remains a hold due to its premium valuation and operational gaps.
• With a $40.17 price target and 17% upside, Southwest’s growth drivers are acknowledged, but the stock is not yet a buy.

Southwest Airlines (NYSE:LUV) updated its fourth quarter outlook on the fifth of December, which as I discuss in this report has been a positive revision. The stock initially jumped on the positive news but has since retreated as shown in the image below.

Nevertheless, the stock price now exceeds my price target and that also provides a good time to revisit the valuation case for the low-cost carrier.

Southwest Airlines Guides Up On Unit Revenues

In general, the outlook has remained largely unchanged compared to previous estimates. RASM has been guided up to 5.5-7 percent on the back of strong demand as well as network and capacity rationalization and improved used of revenue management techniques. At the same time, the fuel price per gallon has been increased by $0.10 per gallon. So, it remains to be seen whether the improved revenue outlook will translate positively to earnings.

Perhaps more positive is that the company expects to announce an accelerated share repurchase program of $750 million, which is enabled by delivery delays that lower CapEx as well as Southwest Airlines’ aim to generate value through sale-and-lease-back transactions. I believe the ASR can be seen as a way for Southwest Airlines to appease investors. The company already detailed several initiatives to boost the business that has been lacking some value generation. I consider the initiatives to be picking the low-hanging fruit but it is still something. Southwest Airlines also has some steps to make to close yield gaps with peers so the easy steps at this point are also the best steps.

Southwest Airlines Stock Remains A Hold Despite Improved Outlook

To determine multi-year price targets The Aerospace Forum has developed a stock screener which uses a combination of analyst consensus on EBITDA, cash flows and the most recent balance sheet data. Each quarter, we revisit those assumptions and update the stock price targets accordingly. In a separate blog, I have detailed our analysis methodology.

For Southwest Airlines the EBITDA generation has been revised upwards by 16.5% to $8.7 billion between 2024 and 2026 while free cash flow burn estimates have been lowered by $800 to $940 million on the back of lower CapEx. That, in combination with expected share repurchases in the coming years, is however not enough to swing the rating from hold to buy. Southwest Airlines still has to proof that it can extract the value as intended and it is still steps behind compared to peers.

Valuing the company against the elevated EV/EBITDA multiple that it has historically traded at, we see that 2025 earnings have been priced in. If we go ahead and price in the FY26 earnings since I tend to value stocks one year ahead and we are about to enter 2026 then we see that there is a $40.15 price target indicating 17% upside. That is appealing upside but not enough to command a buy rating given that the company trades ahead of peers while it also is behind compared to peers in terms of operational performance.

Conclusion: Southwest Airlines Has Growth Drivers But Stock Remains A Hold

I do believe that the Q4 guidance update was positive, and we see an increased focus on driving value to shareholders. However, much of the upside for 2025 has already been priced in and given that the company trades at a premium to peers while I believe it is not fully deserving of that premium, I mark the stock a hold with a $40.17 price target.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

If you want full access to all our reports, data and investing ideas, join The Aerospace Forum, the #1 aerospace, defense and airline investment research service on Seeking Alpha, with access to evoX Data Analytics, our in-house developed data analytics platform.