• Southwest Airlines, once a top performer, has struggled post-pandemic but is implementing significant strategic changes to regain profitability and market position.
• Key initiatives include network restructuring, adding redeye flights, and product changes like assigned seating and extra legroom seats to boost revenue.
• Southwest’s strong balance sheet allows for continued dividends and share repurchases, positioning it well for future growth despite recent challenges.
• The market undervalues Southwest’s potential improvements, making it a buy now with expectations to become a strong buy in 2025.

Any investor in the airline industry knows the legacy that Southwest Airlines (NYSE:LUV) built for itself in its first 50 years of service. Until the covid pandemic, Southwest was considered the best-run, most consistently profitable, and often the highest market cap airline in the world. But Southwest’s fortunes have taken a dramatic turn for the worse over the past three years, and one look at its stock chart and analyst recommendations show that a fundamental change has taken place in how the Dallas-based airline is viewed.

The pandemic served as a dividing line in the success or failure of many organizations, and that is certainly no more true that for the U.S. airline industry and many of its companies. Delta Air Lines (DAL) frequently traded places with Southwest in the latter part of the decade of the 2010s as the highest market cap airline in the world, and now DAL is worth twice as much as LUV. United (UAL) has seen significant fruit from its efforts to become a much more profitable and valuable company and is worth 1.5X as much as LUV.

Southwest now finds itself in a pretty large pack of U.S. airlines that have been breakeven at best and money-losing for parts of the past three years. Southwest’s north Texas-based rival, American (AAL), continues to generate low single digit net profit margins, a territory that LUV is occupying more time than not. The ultra-low cost carrier segment of the U.S. industry is in turmoil, highlighted by the chapter 11 filing of Spirit Airlines, and low margins or losses for Frontier (ULCC) and Allegiant (ALGT), joined by low-cost carrier JetBlue (JBLU). Most of the U.S. airline capacity is being flown by carriers that are not consistently generating even 3% net profit margins.

There are common reasons why the two top performers, DAL and UAL and some of their foreign counterparts, are doing as well as they are, and there are also common themes around the underperformance of most of the rest of the U.S. carrier industry. Some carriers like AAL have made high-profile executive reassignments to try to address strategic errors that have weighed down that company while LUV opened 2024 with a sense that it needed to change but moved slowly to address problems that many of its critics, let alone some of its own employees and supporters believed needed to be addressed; the involvement of Elliott Investment Management, L.P., turbocharged change at Southwest, resulting in a truce that gives the low-cost carrier that became a model for dozens of airlines around the world a mere few quarters to begin to see improvements or face an even deeper loss of control than the settlement, which has led to a turnover in the board and senior leadership changes but largely leads Southwest still in a position to control its destiny.

In comparing Southwest’s financial performance to its more profitable U.S. global competitors, Elliott hammered away at the need for Southwest to seek greater revenue opportunities through a more sophisticated business model that was less focused on the product attributes such as open, all alike seating and free checked bags that built Southwest and more focused on the evolving travel market that is increasingly willing to pay good money for more premium travel experiences. In addition, Southwest continues to overcome the enormous reputational damage that came from its weeklong operational meltdown during the Christmas 2022 holiday period.

The good news is that Southwest has announced a large number of strategic changes that will begin to go in effect in 2025 even after a healthy and robust winter 2024-25 holiday travel season that appears to be benefitting all airlines. Let’s look at each of these factors and attempt to gain insight into the benefit each will have for Southwest.

A healthy industry backdrop

First, the industry noted a deterioration in domestic and near-international (largely Latin and Caribbean) yields in the spring and summer of 2024. JetBlue and Spirit, two of the weaker carriers in the industry, announced fairly significant reductions in capacity that amount to 8-10% of each carrier’s capacity in the fall; cumulatively, industry capacity esp. in leisure markets, fell about 2-3% during the fall helping to reduce industry yield erosion during non-holiday periods of the fall. The Thanksgiving holiday season was strong throughout the industry, which has led to improved investor guidance from several airlines. The winter/Christmas/New Year’s holidays are also expected to be strong.

In addition, crude oil prices remain stable and at the low end of what they have been over the past year. Although LUV hedges fuel and is expected to lose more money on its hedges in the current quarter than it gains in benefits from those hedges, fuel prices are expected to remain below year-ago levels not just for the remainder of this quarter but also into at least the early part of 2025.

Against a healthy industry capacity background and stable fuel prices, Southwest will benefit from several of its own initiatives and strategies. Primary among the benefits is that LUV is expected to have stable labor costs throughout 2025. The industry has struggled with increasing labor costs since the pandemic, when many airline employees left the industry, requiring large increases to attract new staff. Southwest settled with all of its labor groups earlier in 2024 and paid the retroactive payments that have been common with airline labor contract settlements post-covid. Several competitors, including United with its flight attendants, have yet to settle with all of their labor groups, so LUV will competitively have a more stable labor cost profile in 2025 and beyond than some of LUV’s competitors.

Network changes

One of the most significant groups of changes that will take place beginning in 2025 is a significant restructuring of its network. Since its inception, Southwest has never operated a redeye flight, or one that leaves before midnight of one day and lands in the early morning hours of the following day. As Southwest’s network has grown from coast to coast, they lost a certain amount of aircraft and network scheduling efficiency that comes by having redeye flights, which nearly every U.S. airline uses. Now that LUV’s network spans from Hawaii to the East Coast, there is currently a very narrow window when it is possible for a person to fly on Southwest from one end of Southwest’s network eastbound to the opposite end, while many competitors have networks that allow that many times per day. While Southwest’s former reservations and operations systems did not support redeye flights and its labor contracts did not permit them, LUV now has the green light to add redeye flights. Beginning in February of 2025, Southwest will begin operating redeye flights, first from its major bases in California to its major bases in the Midwest and Eastern US. Its rollout of redeye flight will be fairly quick, with Hawaii being added in the spring and additional markets added by summer. In the process, Southwest will gain up to a dozen new aircraft worth of flying using its current fleet. In addition, Southwest has struggled with getting airplane deliveries from Boeing, so is now currently facing a shrinking fleet as a certain number of aircraft reach the point where they can no longer be economically maintained in the fleet. Operating redeyes helps to offset the drawdown of Southwest’s fleet that is occurring. Further, Southwest’s fleet involves a larger number of larger 737-800s and MAX 8s which seat 175 seats and which are more economical on longer flights. Instead of making multiple stops back to the east coast as many LUV flights do, use of the larger aircraft will create efficiencies that are maximized by operating the aircraft across two-thirds or more of the continental U.S. It will be possible to leave Southwest’s Hawaii stations at multiple time windows per day and fly through to the east coast as happens routinely on other carriers. Finally, by operating redeyes, Southwest will eliminate a number of late night and early morning short flights which generate lower yields. Although redeye flights are typically not the highest yielding flights in a market, they are usually more economical to operate because there are few fixed and only marginal costs – the airplane would otherwise sit someplace overnight – while late night short-haul flights typically are only valuable for connecting passengers with local passengers in those markets choosing more body-friendly schedules.

In addition to beginning to operate redeyes, Southwest will trim its intra-Hawaii flying, which Elliott identified as underperforming. Hawaiian Airlines, now a part of Alaska Airlines (ALK), operating the only intra-island service in Hawaii for years. Although there have been local competitors and some mainland-based airlines have extended their flights to Hawaii to other islands, Southwest saw an opportunity in launching its service to Hawaii only a few years ago in adding service between some of the Hawaiian Islands. Southwest expected to receive 737-MAX 7s when it launched its Hawaii service; instead it has had to use MAX 8s which have 25 more seats, so LUV has been unable to fill as many seats on the larger plane. Trimming the schedule will help increase LUV’s loads and reduce its costs. Southwest’s schedule adjustments to/from/within Hawaii, including the addition of redeyes could be one of the largest parts of Southwest’s network adjustments.

In addition to Hawaii, Southwest is making adjustments in other markets, particularly in shifting its southeast U.S. focus from Atlanta to Nashville. It is also growing capacity in higher growth markets such as Denver while trimming capacity in some hubs such as Chicago.

Southwest has made few changes to its operations at Dallas Love Field, where the carrier has its headquarters. However, nearly 50 years of air service restrictions on operations in N. Texas end next year, ending decades of feuds primarily between American and Southwest, which have dueling hubs and headquarters in the region. Southwest could expand to DFW airport but could also add service to any of a number of airports in N. Texas which it has not been able to open because of these restrictions.

Product changes

Southwest is making significant changes to its product

Since its inception, Southwest has operated with a first-come first-served seating model that is unique among large U.S. airlines as well as among those around the world. As a result, Southwest’s boarding process is unique in the U.S. as passengers are assigned a unique boarding number which dictates when each passenger can board. Each passenger cannot board earlier than the number they have been assigned and if they board later, they risk getting a lower quality seat – either further back in the aircraft or different from their preference of aisle or window.

Although it worked well even being unique, Southwest’s boarding system has created a cottage industry of people that work to get a higher boarding priority than they otherwise would have been entitled. Southwest, like nearly all U.S. airlines, allows passengers to board early based on their own request for extra time in boarding which, in the Southwest system, allows someone to get a potentially better seat on the plane. In addition, every other airline in the U.S. that assigns seats puts a monetary value on those seats which are desired the most, and the airline gains revenue from selling those more valuable seats. In addition, nearly every other airline has seats which offer some type of extra space – either in a separate cabin or extra space seats in the same cabin. Southwest’s egalitarian approach to seating has eliminated any possibility of gaining any revenue from those types of seats. Elliott was quite adamant that LUV could be monetizing its seats and generating revenue.

Southwest’s entire seating system will change in 2025, although a specific date has not been established. LUV will begin adding extra legroom seats to its fleet early in 2025 but will not begin monetizing them while the aircraft modification process takes place across its fleet. Later in 2025, Southwest will begin assigning seats and giving the best seats to the passengers that pay the highest fare. Customers that pay the lowest fare may not be given a seat assignment until close to departure and may end up with a middle seat or a seat closer to the rear of the aircraft. With assigned seats, there will be no incentive for someone to preboard to get a better seat. One of the key benefits of assigned seating is that by reducing the number of passengers that preboard including those passengers that ask for a wheelchair to board but manage to walk off the aircraft, Southwest will be able to reduce the amount of time that each aircraft needs on the ground. Reducing turn times will increase aircraft utilization and generate the equivalent of more than a dozen additional aircraft per day.

Southwest will also be enhancing its revenue management processes to increase revenue on full flights. In addition, it will begin cooperating with other airlines including carriers like Icelandair that will operate international flights to Southwest hubs where Southwest will complete the journey. Southwest will add larger overhead bins, improved onboard WiFi and add equipment to charge personal electronic devices, a necessity on longer flights, esp. as Southwest’s average flight length continues to grow.

An Enviable Balance sheet

Southwest is one of the few airlines in the world that has had the luxury to endure a couple of years of low profits and still remain at or near the top of the global industry in terms of financial strength. Government aid during the pandemic pushed back some of the restructuring that some companies needed to do but have not done. Southwest is moving forward with a major restructuring of its finances and its operations that will bear fruit. Southwest will continue to pay the richest dividend in the U.S. airline industry and will begin an aggressive share repurchase program.

LUV will benefit from its deep pockets and its strong relationship with Boeing that will allow it to operate one of the most modern and fuel-efficient fleets in the world even while selling off many of its older aircraft including many of its 737-800s which are too large and do not have the new generation engines that Southwest wants.

Conclusion

Southwest Airlines has long been one of the best-run companies in the global airline industry. It lost its footing esp. in the post-covid environment but is embarking on one of the most dramatic restructurings that any airline has undertaken. The benefits from LUV’s efforts will reach $4 billion in just a few years and will begin accruing at a fairly rapid rate in 2025.

I believe the market is not fully valuing the improvements that will come to LUV’s finances and believe it is at least a buy which, I believe, will grow to a strong buy during 2025.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in LUV over 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.

The post Southwest Airlines Will Deliver Great News Into 2025 And Beyond appeared first on Up2info.com.

• 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. 

The post Southwest Airlines Stock: More LUV After Positive News And Share Repurchase Announcement? appeared first on Up2info.com.

• Airline stocks soar as Southwest and American Airlines raise guidance, with AAL up 15% and Southwest, United, and Delta up around 5%.
• Kroger’s earnings impacted by lower fuel prices and specialty pharmacy sale, but sees slight profit improvement.
• Disney increases its dividend, paying $1.00/share in fiscal 2024, up from $0.75/share, benefiting investors on Walt Disney’s birthday.
• Bitcoin prices surge on anticipation of favorable crypto regulations, with predictions of a strategic bitcoin reserve potentially pushing prices above $400,000.

Listen below or on the go on Apple Podcasts and Spotify

American and Southwest get bullish for holiday demand. (0:15) Disney raises dividend. (1:53) Intel appoints two new board members. (4:26)

This is an abridged transcript of the podcast.

Our top story so far. Airline stocks are heading higher on bullish comments from Southwest (NYSE:LUV) about travel trends and increased guidance from American Airlines (NASDAQ:AAL).

Southwest raised its unit revenue per available seat mile for the current quarter. Unit revenue is now expected to increase by 5.5% to 7% from initial estimates of up 3.5% to up 5.5%.

The carrier said it is “encouraged by recent revenue trends and forward bookings, including fourth quarter holiday travel, and currently expects strong revenue trends and tactical initiative performance to carry into 2025.”

American is now looking for adjusted Q4 EPS of $0.55 to $0.75, more than double its previous range of $0.25 to $0.50.

It sees total revenue per available seat mile to be about flat to up 1% vs the same period in 2023 and cost per available seat mile to be between 5% and 6% vs prior guide of 4% to 6%.

AAL is up 15%, while Southwest, United (UAL), and Delta (DAL) are up around 5%.

Among other active stocks, Kroger’s (KR) Q3 revenue was impacted by lower fuel prices and the sale of its specialty pharmacy business. The effect was offset by a slight improvement in profits and a marginal increase in expectations for FY24 sales.

The company now expects identical sales ex-fuel to increase by 1.20% to 1.50% from prior guidance of up 0.75% to 1.75%. Kroger also narrowed its EPS guidance to a range of $4.35 to $4.45 per share from $4.30 to $4.50 per share, versus the consensus estimate of $4.44 per share.

It’s Walt Disney’s birthday, but investors get the present. Disney (DIS) boosts its dividend to $1.00 per share, up from $0.75 per share paid to shareholders during fiscal 2024.

The dividend will be paid in two installments of $0.50/share semi-annually. Last year the company paid out $0.30/share in the first half, which rose to $0.45 in the second half.

And Synopsys (SNPS) is slumping following weaker-than-expected guidance for fiscal 2025.

But Needham pointed out that guidance missed most estimates due to the extra week during fiscal 2024 versus 2025 and the ramp in hardware revenue expected during the second half of 2025.

In today’s trading, on this day in 1782, Martin Van Buren, who served as president from 1837-41, was born. Following the panic of 1837, Van Buren was a proponent of an Independent Treasury where the U.S. would hold reserves in vaults instead of banks with an aim to take the politics of the money supply. While blocked during his one term, eventual laws for an Independent Treasury led to the Federal Reserve Act in 1913.

One of the aims of crypto has been not just to take the politics, but all of the government, out of the money supply. But it’s anticipation of a friendly crypto government that has prices surging and bitcoin (BTC-USD) above $100,000.

Here’s what SA analysts say:

Kennan Mell says if the new administration creates a strategic bitcoin reserve, other countries will follow suit, and the price could top $400,000.

Wright’s Research says bitcoin and crypto “in general are most likely to be assigned to the ‘greater fool theory.’ “

Joseph Calhoun says the market is “in the midst of one of those periodic eruptions of irrationality that brings forth all manner of con men, flimflam artists, and fraudsters,” but Multiplo calls today a “great entry point” with a favorable regulatory environment coming.

Looking to the economy, weekly initial jobless claims rose to 224,000 vs. 215,000 consensus and 215,000 prior. The four-week moving average was 218,250, an increase of 750,000 from the prior week’s revised average of 217,500.

Pantheon Macro economist Samuel Tombs says they “expect initial claims to rise gradually this winter, sustaining the upward trend in the unemployment rate and putting pressure on the FOMC to continue to reduce the funds rate.”

In other news of note, Intel (INTC) said it has appointed former ASML executive Eric Meurice, and the interim CEO of Microchip, Steve Sanghi, to its board.

The appointments are effective immediately, and both will serve as independent directors. The news comes a couple of days after the company said its CEO, Pat Gelsinger, is retiring and will be replaced by co-CEOs David Zinsner and Michelle Johnston Holthaus.

Media reports suggested Gelsinger was forced out at Intel after the board lost confidence.

And in the Wall Street Research Corner, should you be checking Reddit (RDDT) before the opening bell?

Goldman Sachs’ technical specialist Scott Rubner says one of the key dynamics in supporting a year-end stock rally is retail investors, and he’s keeping a close eye on trending names.

Rubner said in late November that a rally would push the S&P 500 (SP500) to 6,200 by the end of 2024.

Retail traders are “home for the holidays” and “unite at the town watering hole,” as they participate in a year-end “FOMO” rally, Rubner said.

“I am back to checking Reddit every morning to see the names of the day.”

Names prevalent on the WallStreetBets subreddit include Nvidia (NVDA), Intuitive Machines (LUNR), and Archer Aviation (ACHR). WallStreetBets was thrust into prominence during the height of the meme-stock craze in 2021.

The Goldman Sachs Equity Panic Index, a rolling percentile of four equity volatility metrics, has wiped out new lows “and we are seeing retail activity pick up,” Rubner added. “This can also been seen in record call options (largest on record) and high-flying names.”

The post Wall Street Lunch: Airline Stocks Take Off appeared first on Up2info.com.

• Southwest Airlines reported a non-GAAP EPS of $0.15, beating expectations, but shares fell due to cost pressures and board changes.
• Elliott Management’s board shakeup adds uncertainty. The company aims to improve profitability, but it raises concerns regarding Southwest’s faltering market niche.
• Southwest’s middle-market position faces challenges, including rising costs, competition from new discount entrants like Breeze, and a potential Spirit-Frontier merger.
• Despite Elliott’s potential turnaround efforts, I remain mildly bearish on LUV stock, expecting persistent profit margin issues and potential recession risks.
• I believe Southwest’s best bullish case would be acquiring a regional-focused airline with non-Boeing planes.

Southwest Airlines Q3 Earnings

Southwest Airlines (NYSE:LUV) reported Q3 earnings Thursday morning, with a non-GAAP EPS of $0.15, beating expectations by $0.11. The company also had $6.87B in revenue, rising 5.2% YoY and $80M above expectations. Although Southwest beat estimates, it only outperformed by a small degree, rising slightly initially but opening 2.5% lower. LUV fell 4% lower by mid-morning Thursday.

The primary cause for its higher revenue was a slight improvement in pricing and demand, with some rebooking benefits after customers were traded during the July CrowdStrike (CRWD) outage. Per its new guidance, the company’s revenue per available seat mile will rise 3.5% to 5.5% YoY by Q4. However, it also expects costs per available seat mile to increase 11% to 13% outside of fuel costs, indicating continued labor and maintenance cost pressures. Its available seat miles are also anticipated to fall 4%, likely due to ending its market in many less efficient locations.

It reversed the small early morning gains from when it announced its deal with Elliott Management that keeps CEO Bob Jordan and removes board chairman Gary Kelly. Elliott secured the appointment of six new directors to Southwest’s board, ending the proxy war issue. Elliott’s overarching goal is to refresh the board with independent industry experts to hold management accountable and improve financial performance. Although Elliott’s authority is expanded, this deal does not give it majority control of the now 13-member board.

Fundamentally, this significant change to Southwest’s board significantly increases uncertainty. Although Elliott management has indicated an effort to increase Southwest’s profits, others argue the activist lacks understanding of its businesses. Earlier this year, Elliott suggested that Southwest’s turnaround strategy was filled with too many “long-dated promises“, indicating Elliot may want to see a more rapid improvement in its cost and profitability issues. From an investor standpoint, I tend to agree with Elliott’s view but see that the substantial board shift is a net negative for its valuation because it creates significant uncertainty regarding how it will change. For me, this adds to the problem of…

Southwest’s Growing Identity Crisis

I have had a historically bearish view of LUV. In February, I last covered the company in “Southwest Airlines: Risking Going From One Extreme To The Other.” The stock is down a half-percent since then, effectively unchanged despite a 17.2% return in the S&P 500. Airlines had a difficult start to the year amid the combination of slowing (but high) economic demand and rising costs, leading to lower operating margins. However, the economy’s surprising resilience in the past three months has lifted the market, leading to a 52% rise for United (UAL), 22% for American (AAL), 26% for Delta Air Lines (DAL), and 21% for JetBlue (JBLU). However, Southwest is only up ~13%, better than Spirit’s (SAVE) 9% (SAVE is still down 83% YTD).

For the most part, airlines have been awful investments over the past decade. Between these six, Southwest is in the middle, with a total return of 2% over the past decade:

I believe these six reflect the general trends in the US airline industry. Delta, American, and United are typically higher-cost and quality airlines, while JetBlue and Spirit are usually cheaper. Southwest falls somewhere in the middle, transitioning from the “budget airline” segment but not rising sufficiently to command market power like the “big three.”

Certainly, airlines’ immense losses during the 2020 lockdowns played a role in their weak performance. That said, airlines face enormous competitive pressures that make profitability difficult without carving a clear niche. On a TTM basis, excluding Q3 performance, Southwest had negative operating margins, reflecting the negative trend of US airlines in general since 2022:

Significant increases in airline labor and maintenance costs primarily cause this trend. Fuel costs were a temporary negative factor in 2022, but if anything, they are a positive factor today as oil and gas are relatively cheap. Demand is not a significant issue, with air travel activity consistently hitting all-time highs. TSA travel checkpoint numbers are currently up ~1.4% YoY, indicating it may be flattening, but it is still well above pre-COVID levels.

Although Elliott may see the discrepancy between travel activity and Southwest’s profits as a significant company-specific issue, it is seen across most of the industry. Delta and SkyWest are among the only ones not seeing margins fall. Delta has a tremendous quality niche benefit, allowing it to charge the most per mile at $0.176. Notably, Southwest is the second highest at $0.1732, above United and American, though it should be just below them if we account for its lack of bag fees. As I’ve discussed, SkyWest’s advantage is its virtual monopoly on regional routes, and it gets direct sales from Big Three firms as a contractor.

Southwest announced changes in September aimed at improving profitability. This includes shifting to assigned seating, potentially giving it added margins from premium seating. The carrier will also allow boarding with upgrades aimed at catering to loyal customers while maintaining its free bag policy. The airline also aims to reduce the time it takes to turn aircraft and will begin to offer redeye flights in key markets in early 2025.

I believe Southwest’s changes continue to make it look more like the “Big Three” as it has continually trended into those markets, first by expanding beyond its region, then shifting away from its focus on “simplification” and middle-class-oriented travel. However, although its pricing strategy looks more similar to those seen in the big three, it lacks lounges, long-haul flying, and many other benefits the larger carriers have. At the same time, it’s losing its hold on the middle-class friendly budget status, particularly as new entrants like Breeze (private, started by JetBlue’s founder David Neeleman) offer even lower-cost flights with a regional focus.

Investors may want to pay attention to Breeze. Being private, it has not had as much attention, but I think its rise is a clear negative headwind for Southwest, JetBlue, and others in the middle price range. Although Breeze lacks consistent profitability, it was not operating in 2020, so it does not have the immense financial debt burden carried by most other airlines after that point. Unlike Southwest, struggling with 737 MAX costs and an aging fleet, Breeze has a young fleet of Airbus A220s, isolating it from Boeing’s (BA) growing list of difficulties, indirectly pushing many airline’s maintenance and capital costs up.

LUV Stock’s Valuation Remains Concerning

Southwest is expected to see weak EPS at ~$0.59, recovering thereafter. However, its two-year ahead EPS outlook has trended lower throughout most of 2024, with its EBITDA estimate seeing even greater pressure. Southwest’s revenue expectations have also slowed but remain relatively high, indicating analysts are not expecting a recessionary headwind for air travel, but are also not looking for continued growth. See below:

To simplify, Southwest’s cost issues are expected to worsen through 2025 before improving. That said, analysts have revised negatively, meaning cost issues may not be alleviated as soon as expected. Indeed, looking at Boeing’s issues, pilots receiving training at Southwest before leaving for better airlines, and the general rebound in inflation expectations, I see little reason why cost pressures will decrease. Further, with the rise of Breeze, I think Southwest is at increasing risk of seeing lower revenue due to lost customers, particularly as it moves away from its previous core strategy, which may accelerate with Elliott’s new position.

Despite its weakness, Southwest remains relatively expensive compared to its peers on a forward “EV/EBITDA” basis. See below:

Spirit is excluded, given its forward EBITDA is not likely positive. At one extreme, we see Frontier (ULCC) at an extremely low valuation, reflecting its risk of following in Spirit’s direction. JetBlue and Southwest are toward the top, reflecting a high price and their shared profit margin issues, which I feel relate to their “stuck in the middle” market position. Alaska is interesting, having a very low-forward “EV/EBITDA.” I believe Alaska may be an interesting pick, given its merger with Hawaiian.

The Bottom Line

Southwest’s overarching issue may be that it is a middle-class-focused airline in an economy losing its middle class. Consumer bifurcation has accelerated since 2020, where one portion of people see wages continue to rise faster than inflation, and the other sees the opposite. Specifically, that considers recent inflation has hit lower and middle-income people the most. Although bifurcation has been a trend in retail for many years, I think it’s bleeding into airlines, with people opting more for high-cost Delta and others for the most discounted airlines. As a result, those in the middle, such as Southwest, don’t have the dedicated segment they used to. Unfortunately, I expect this trend will only continue, given how long the income bifurcation trend is accelerating.

Unfortunately for Elliott Management, I am not sure Southwest can dramatically change its position. I’d bet the company would be better off looking to go back toward its routes with competitive pricing and a focus on underserved regional markets where it may find pricing power. That is essentially the opposite approach to its outgoing management team, which has tried to expand toward the Big Three markets, resulting in competitive pricing difficulties.

I am mildly bearish on LUV, believing that its profit margin issues will persist longer than analysts currently expect. Further, I think there is significant potential that consumer demand for air travel falter due to recession risks. However, I admit the unemployment trend is not as bearish today as it was months ago. Still, with its pricing not being competitive, I think discount airlines struggling today will see a recessionary benefit, which may alleviate labor cost-growth issues.

I am not so bearish that I would bet against the stock, particularly when Elliott may have better turnaround ideas. In my view, Southwest’s best bullish case is if it can acquire a failing discount airline with non-Boeing planes that are accessible to regional markets. Of course, the FTC’s decision to block the Spirit-Jet Blue merger pours cold water on that potential. Investors may also want to watch the renewed merger talks between the struggling Spirit Airlines and Frontier, as that may fortify the discount airlines’ weakening positions, likely to Southwest’s disadvantage.

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.

The post Southwest Q3 Earnings: Forward Guidance Disappoints On Cost Concerns appeared first on Up2info.com.

• Southwest Airlines maintained more routes during COVID-19, leveraging domestic travel focus and expanding to new vacation destinations, unlike competitors who cut routes significantly.
• Post-pandemic, Southwest faced challenges including a system failure, outdated IT infrastructure, and rising prices, losing its low-cost advantage to competitors like Frontier and Spirit.
• Elliott Management’s 11% stake led to proposed changes like assigned seating and premium options, but these are not innovative and may not ensure growth.
• Southwest remains far from pre-pandemic recovery, with competitors like United and Delta showing more significant growth, raising doubts about the effectiveness of Elliott’s proposed changes.

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How did we get here?

Once considered a highly innovative company, Southwest (NYSE:LUV) has shown signs of struggling to compete against rival airlines. Additionally, due to rising prices, Southwest can no longer be considered the ‘go to’ budget airline for budget-concerned consumers. This article is meant to display that Southwest’s strategies implemented during COVID have led to the situation it is in now. I believe the changes recently suggested by Elliott Management may be too little too late.

Atypical Strategy During COVID-19 Lockdowns

During the peak of the COVID-19 pandemic, Southwest Airlines was the least aggressive in cutting back its flights compared to other competitors in the industry. The main explanation is Southwest’s unique focus on domestic travel compared to international travel. While their competitors had to reduce their routes offered by 60-65%, Southwest maintained more than 70% of the total routes during the peak of the COIVD-19 Pandemic.

This gave them a chance to outcompete the other airlines in the industry. CEO Gary Kelly took the opportunity and expanded their routes to many vacation destinations that were not previously offered. At the same time, the other three main airlines [Delta (DAL), United (UAL), and American (AAL)] aimed to maintain their hub-and-spoke system. The CEO of Delta Air Lines, Edward Bastian, aimed to preserve Delta’s financial liquidity and ensure they were well positioned for recovery.

Southwest’s seat reductions from 2019 to 2020 decreased by 32.6%. This was significantly lower than the other three major airlines (Delta 44.2%, American Airlines 41.5%, United 54.4%). Southwest had many other expansionary policies during COVID-19 compared to other airlines, such as using larger airplanes than their competitors. In addition, in March 2021, Southwest reached a deal with Boeing for 100 new 737 MAX 7’s.

More Trouble For Southwest

After the lockdowns caused by the pandemic ceased, trouble began for Southwest Airlines. Their vision of capitalizing on their competitive advantage started slipping. They could not account for a complete system failure in December 2022, which canceled over 15,000 flights mainly due to outdated IT infrastructure and only made worse by their point-to-point flight strategy.

Additionally, their entire fleet is Boeing-manufactured planes, so orders for planes were delayed after Boeing experienced a malfunction in a door plug. This caused Southwest to announce they would cut 2,000 jobs in April 2024. However, they also reported first-quarter losses of $231 million, which was more than the previous year, even though Southwest reported an increase in revenue by 10.9% in that same time frame. Southwest Airlines also announced they would cut specific flight destinations, which continued up until September of this year.

Q2 Quantitative Analysis

Southwest has had an acceptable Q2 performance this year. Revenue for the quarter stands at $7.4 billion (4.5% year-over-year). In addition, its liquidity is $11 billion, with an outstanding debt of over $8 billion. However, revenue per available seat mile (RASM) decreased 3.8% year-over-year. This could be attributed to increased competition in the industry. Southwest explained this decrease by stating, “industry-wide domestic capacity growth [is] outpacing demand.” In my view, this answer is lackluster, considering they generated an advantage throughout the recent pandemic and could not maintain it. Cost per available seated mile is projected to increase 11%-13% in the third quarter, and year-over-year expected to increase 7%-8%. This displays a rise in costs, which could hurt the profitability of Southwest.

I will now compare Southwest’s results to United Airlines’ results and attempt to account for the size differences of the respective companies reasonably. United’s operating revenue was $15 billion (5.7% year-over-year). The company’s liquidity was $18.2 billion, with an outstanding debt of $26.6 billion. Revenue per available seat mile decreased 2.4% year-over-year. Cost per available seated mile decreased 4.8% compared to the second quarter of 2023. Notably, premium revenues grew 8.5%, and basic economy revenues grew 38% compared to the same quarter last year. CEO Scott Kirby said the following about the aforementioned metrics, “The revenue diversity advantages that we’ve built with our premium customers, Basic Economy customers, and domestic road warriors, on top of the world’s best loyalty program and leading customer service, have propelled our margins to near the top of the industry,”

Where Southwest Is Today

Southwest’s situation has only become more complicated because of its rising prices compared to its competitors. Southwest has always aimed to be a low-cost airline. However, smaller competitors such as Frontier and Spirit Airlines have come in at significantly cheaper prices in recent years.

From a consumer’s perspective, they see an airline that has become more expensive than the competition and cannot compete with Delta, United, or American in terms of quality. This has lost some of their customer base, and their staple free bag policy can be a selling point to some. However, this also leaves significant questions on how much possible revenue they are leaving on the table.

After Elliott Management announced their 11% stake in Southwest Airlines, they criticized how Bob Jordan was running Southwest Airlines. They also outlined a plan for the company that included: Assigned seating, premium seating, boarding changes, and the introduction of red-eye flights. On July 3rd, of this year, the company adopted a poison pill policy to attempt to stave off the ‘hostile takeover.’

These proposed changes are projected to take three years. However, the majority of their competitors have most if not all of these changes already established in their company. To make things more challenging, Elliott is also calling for the replacement of the board of directors at Southwest Airlines. This marks clear instability within the company itself, and could lead to a further departure from the company’s values.

The questions remain, how long will this entire process take, and what will be the outcome?

If Elliott Management succeeds, the airline will still have a long road to recovery, and during that time, its main competitors will likely capture some of their market share. I believe that Southwest’s changes are not innovative to the industry, so there is speculation on how effective they will be for the company’s growth.

Conclusion

Southwest Airlines is still far from recovery since the pre-pandemic era. The company has also not reached its peak achieved in 2015. The only other airline that shares this commonality is American Airlines. United and Delta Air Lines both show much more significant signs of growth than Southwest.

Elliott’s proposed changes aim to modernize Southwest and offer more luxury seating to consumers. However, United and Delta already cater to this style of flight. Once Elliott’s proposed changes can be implemented in Southwest, it’s uncertain how much they will actually affect the growth of the company in the long term.

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.

The post Southwest’s Lead From COVID Has Dissipated, And Now They Face The Consequences appeared first on Up2info.com.

• Southwest Airlines aims for $4 billion EBIT by 2027 through low CapEx initiatives, focusing on asset utilization and cabin product enhancements.
• Elliott Investment Management’s criticism highlights Southwest’s lag in industry trends but lacks concrete solutions for boosting profits.
• Despite revenue and cost optimization efforts, Southwest’s stock remains a hold due to historical underperformance and modest growth projections.
• LUV’s initiatives, like priority boarding and seat selection fees, are standard industry practices, underscoring its need to catch up.

Southwest Airlines (NYSE:LUV) hosted its investor day on the 26th of September and the company had a lot to announce in terms of driving revenues and profits, targeting an EBIT of $4 billion by 2027. While there is a lot that Southwest Airlines discussed, I will only touch upon the main items, which already will be a lot to unpack and connect to the investment case for Southwest Airlines.

Elliott And Southwest Airlines Clash

The investor day took place at a time when things are getting heated between Elliott and Southwest Airlines. Elliott Investment Management disclosed a stake in Southwest Airlines in June and has been seeking to replace the CEO Robert Jordan and Executive Chairman Gary Kelly while it also looked to nominate 10 people to the board. While Elliott has not been unsuccessful in driving share prices up in companies in which it takes an activist shareholder position, I am not quite impressed with what they provide in terms of solutions for Southwest Airlines.

The company argues that the enterprise value of Southwest Airlines reflects the value of the airline’s airplanes, thereby suggesting that the airline does not generate any value. A calculation using current market values in high and low-case scenarios shows that the airplanes are worth between $12.5 billion and $26.8 billion and $19.6 billion at the midpoint. However, that is when we really take the average value among all the models. The way Elliott does the math is not entirely clear and calculating airplane values is a science by itself, but if we take the average value of the Boeing 737-800/MAX8 fleet and the low end of the value for the Boeing 737-700, we would get to $16.8 billion which is close to what Elliott portrays as the value of the fleet. I would argue that the Boeing 737-800/MAX8 are in high demand, and one should be using the high end of the fleet value which brings the value to $21 billion. So, that would even enforce Elliott’s view were it not that comparing the enterprise value with the value of the aircraft actually tells the story of investors not even valuing the business that the company derives from its aircraft. There would be a $1 billion underappreciation of the business by shareholders or even $5 billion according to my calculations just to value the airplanes and that does not value the business derived from the airline operations. It does not mean that Southwest Airlines does not generate value, it means investors have not incorporated it in the stock price. Those are two different things.

Furthermore, in a presentation of 50 slides, Elliott provides a lot of material to imply that the company does not deliver. However, it does so without recognizing the simple fact that the operational environment has significantly changed for many airlines and that whatever technology investments the company did not make before the operational meltdown in December 2022 had to be made in 2023 and 2024 at inflated levels while revenue initiatives had to be delayed to get the technology backbone up to the standard to support the value that the airline wants to create. Essentially, Elliott provided no solutions for Southwest Airlines to boost profits.

Southwest Airlines Looks To Optimize Its Assets Utilization And Cabin Product

If there is one thing that Eliott might be right about, it is the fact that relative to peers Southwest Airlines has not performed well. The yield get was 3.5 cents four years ago, and it has widened to 5.7 cents. There are a variety of reasons for that such as delays of new Boeing 737 MAX deliveries to the airline, which is not unique to Southwest Airlines, but Southwest Airlines operates an all-Boeing fleet and problems at Boeing bite them back a bit harder. Furthermore, the investments in technology that Southwest did not make in 2018, they definitely had to make them after the December 2022 operational meltdown.

Furthermore, we see that the airline has a yield that is between LCCs and ULCCs. Improving revenue management and revenue initiatives here is a big thing. Among all low-cost carriers, it is almost standard practice that you pay for every extra added piece of service you desire. However, Southwest Airlines for instance still does not charge for bags and it will not. The company has looked into the impact and while it would increase bag fees by $1 billion to 1.5 billion, it would lose $1.80 billion in revenues. So, the company looked at other options.

The revenue initiative starts outside of the airplane. Obviously, when you book a flight, that is revenue management already full in play. However, what I mean is that from the moment you board and perhaps check in your bags that is the moment at which Southwest Airlines already can sell you the premium experience. It is all about taking existing pieces of service and charging for it where it makes sense. So, boarding priority can be bundled into a fare product. Another option is seat selection. Even at the legacy carriers that I fly in Europe, I have to pay for seat selection. Legacy carriers also have done a great job with cabin segmentation following a trend of dividing economy into economy and premium economy, and that is where Southwest definitely has fallen behind. The company now is optimizing the value of its cabin space by implementing extra legroom seating at little to no cost to the capacity of the cabin. The company is also rolling out modernized cabins. Starting Q1 2025, the company aims to start rolling out the ELR-configured airplanes at a rate of 50 to 100 airplanes per month. That means that in 8 to 16 months all airplanes should be retrofitted. This should result in $1.5 billion higher EBIT by 2027 at little to no additional costs.

So, the cabin initiatives are mostly about introducing a cabin standard and putting a fare system in places that harvests more revenues from passengers already carried. The second set of low investment cost initiatives is the introduction of 24-hour operations with the so-called redeye flights. Those are not new, we heard about that plan in the past, but it is highly likely that the company had not introduced it as it addressed the technological shortfalls of its systems.

With the redeye flights, the company hopes to provide solutions to connect passengers for morning flights and the company does not require additional aircraft for it. By carrying out redeye flights, the company will add capacity equivalent to 18 airplanes in 2025 and 28 by 2027 without actually adding those aircraft. It’s pure asset utilization-based capacity growth. Furthermore, the company aims to increase its turn times, which should increase capacity to an equivalent of 16 airplanes by November 2025. So, by 2027 Southwest Airlines will increase its capacity by the equivalent of 44 airplanes without actually having to spend money to add extra airplanes. All of that feathers into a capacity expansion plan of 1 to 2 percent per year towards 2027 with minimal CapEx.

Southwest Airlines Aims For $4 Billion EBIT By 2027

It is important to keep in mind that what Southwest Airlines has in the works to increase EBIT is not rocket science, it is the low-hanging fruit. The pressure from Elliott likely has increased Southwest Airlines’ effort to implement these changes. Obviously, we have to see whether Southwest Airlines will be able to deliver on these EBIT targets but from what I can see, the initiatives themselves are fairly easy to implement with a low CapEx requirement. Over time, one of the bigger cost savers could become the shift to the MAX 7/8 planned by 2031. With 15% in fuel burn savings, that should really make a difference on the expenses.

For the third quarter, the company expects unit revenues to be up 2 to 3 percent instead of down 2 percent to flat. On unit cost, the guidance remained unchanged but fuel cost estimates have come down. So, the third quarter is expected to be stronger than initially anticipated and perhaps the shortage of Boeing deliveries has helped Southwest Airlines to modestly grow the unit revenues. The company also announced a $2.5 billion share repurchase authorization.

Southwest Airlines Stock Is Still A Hold

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 the stock price targets accordingly. In a separate blog, I have detailed our analysis methodology.

While the shareholder returns, cost optimization, asset utilization optimization, and revenue initiatives look like a big deal. The reality is that it doesn’t really make Southwest Airlines stock a buy. The most recent estimates that are currently available show 6.6% growth per annum between 2024 and 2026 while free cash flow will remain negative. Based on these projections and the balance sheet and share repurchases mapped at $500 million per year, we get to an 11% upside for this year and a 42% upside for 2026. This doesn’t get us much further than a hold rating. While the upside is compelling, the historical underperformance against the market makes it questionable whether the fundamental upside I see will also materialize.

Conclusion: Southwest Airlines Picks The Low-Hanging Fruit

Investor Days are always nice because, for a change, we see a focus on medium-term goals and initiatives and the initiatives that Southwest Airlines presented should definitely boost value generation. It does not impress me much. In essence, what the company aims for is low-CapEx enhancements that focus mostly on extracting more value from the cabin and higher asset utilization. That’s really all that there is to it, and in some way, Elliott was right that Southwest Airlines has been falling behind in industry trends because the initiatives that Southwest Airlines presented such as priority boarding, paying for seat selection, and more legroom are well-established industry practices. So, while it is good that Southwest Airlines does implement these things to drive value, they are barely something to be impressed with. I am maintaining my hold rating for the stock, and that is driven by the historical underperformance. Southwest Airlines looks like a great company in the sense that it has an investment grade credit rating and is in a net cash position, but we see little translation of that to the share price value, and in fact, the share repurchases and dividends that the company plans in the year ahead are nothing more and nothing less than the company returning to normalized cash levels of around $3 billion. In some way, we are still not seeing the business deliver sustained value that is driven by the business itself. Perhaps Elliott was right after all.

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. 

The post Southwest Airlines Stock Jumps: Why I Am Not Impressed appeared first on Up2info.com.

Global growth will be a major focus next week for the markets, with the September flash PMIs due to be reported. In the U.S., the core PCE report will be released at the end of the week. The Federal Reserve’s preferred inflation gauge rose 2.6% year-over-year in both July and June. Fresh off the first interest rate cut in more than four years, FOMC members will be back on the speaking circuit, including Chairman Jerome Powell. Amid all the investor focus on the Fed’s rate cuts, Seeking Alpha Investing Group Leader Envision Research noted that the timing and degree of the cuts are still an art rather than a science at this stage “To make things more uncertain, monetary policy, including interest rate cuts, can have a lag time before the impacts are felt in the real economy.”

The earnings calendar in the week ahead includes reports from Micron (MU), AutoZone (AZO), and Costco (NASDAQ:COST), while the event calendar is headlined by Meta Platforms’ (META) annual Meta Connect event. Analysts think that there could still be some spillover from FedEx’s (FDX) worrying guidance update. Another trend for investors to consider is that the week after the September rush of options expirations on triple witching day is historically among the weakest of the year as portfolio managers adjust from their summer vacation slumber.

Earnings spotlight: Tuesday, September 24 – AutoZone (AZO), KB Home (KBH), Thor Industries (THO), and Stitch Fix (SFIX) See the full earnings calendar.

Earnings spotlight: Wednesday, September 25 – Micron Technology (MU) and Jefferies (JEF). See the full earnings calendar.

Earnings spotlight: Thursday, September 26 – Costco Wholesale (COST), Accenture (ACN), Jabil (JBL), and CarMax (KMX).See the full earnings calendar.

Volatility watch: Options trading volume is elevated on (LUNR) and (AZUL). The most overbought stocks per their 14-day relative strength index include Eton Pharmaceuticals (ETON), Primega Group (PGHL), and Immuneering (IMRX). The most oversold stocks per their 14-day Relative Strength Index include BioMarin (BMRN), Integra LifeSciences (IART), and Applied Energetics (OTC:AERG). Short interest is elevated on Verve Therapeutics (VERV) and ALX Oncology Holdings (ALXO).

IPO watch: BKV Corporation (BKV) is expected to price its IPO and start trading in the week ahead. The Denver-based company is described as one of the largest natural gas producers in the Barnett Shale. Healthcare-related Legacy Education (LGCY) is also on the calendar to make its public debut. The California-based company is offering 5M shares in an expected range of $5 to $7. Guardian Pharmacy Services (GRDN) is also set to price its IPO and begin trading. The Atlanta-based company focuses on providing outsourced pharmacy services to long-term healthcare facilities, targeting assisted living, skilled nursing, and behavioral health facilities. IPO lockup periods for certain blocks of shares of Birkenstock (BIRK) and Turbo Energy (TURB) will expire next week.

Dividend watch: Companies that have an ex-dividend date coming next week include Logitech (LOGI), Getty (GTY), Philip Morris (PM), and Nucor (NUE). Companies forecast to increase their quarterly dividend payouts include Accenture (ACN) to $1.47 from $1.29, Honeywell International (HON) to $1.19 from $1.08, and Concentrix (CNXC) to $0.333 from $0.3025. Read through some of the dividend stock picks from Seeking Alpha analysts.

Investor events: Meta Platforms (META) will hold its annual Meta Connect event on September 25. The event focus on the company’s Reality Labs division, and is expected to include reveals of future hardware and software. CEO Mark Zuckerberg will give a keynote address. Intuit (NASDAQ:INTU) will hold its Investor Day event on September 26. Analysts have pointed to the potential that strategic updates and an AI roadmap could perk up shares. On the same day, Zeta Global (NYSE:ZETA) will hold its Zeta Live event. Bank of America tipped that there could be some read-throughs for HubSpot (HUBS) and Salesforce (CRM) in addition to Zeta Global.

Costco earnings preview Costco (COST) will release its FQ4 earnings report on September 26. Analysts expect the retail giant to report revenue of $79.9 billion, same-store sales growth of 6.3%, a gross margin rate of 19.7%, and EPS of $5.07. Options trading implies a 4.4% share price swing after the report is released. Costco dipped 0.7% after its last earnings report. Looking ahead, Jefferies thinks the long-anticipated membership fee increase announced recently by Costco (COST) is a positive catalyst for earnings and the stock. The firm quantified a possible ~3% benefit to EPS over each of the next two years. Analyst Corey Tarlowe sees potential for a higher COST multiple trading based on the continued productivity growth. A potential catalyst in the year ahead for Costco (COST) could be a stock split. The company fired off its last stock split in January 2000. At the time of that split, Costco’s (COST) stock was trading for a pre-split price of about $100.

Eyes on the skies: Southwest Airlines will host an Investor Day on September 26. Key topics will include 2025 guidance expectations and updates on the order book and fleet modernization. Crucially, the event will also showcase how Southwest Airlines (NYSE:LUV) is making major strategy pivots for the first time in 50 years with the introduction of assigned seating, red-eye flights, and extra legroom seats. The changes are being made to attract new customers to the carrier. Investors will be looking for the impact of LUV’s new network positioning, and how it will manage its revenue management system. Bank of America expects Southwest Airlines (LUV) management to provide more details on the financial benefits of the strategy reset and the near-term impact on cash burn and debt during the transition period. Shares of Southwest Airlines are up 8.5% over the last six weeks.

Spinoff watch: The spinoff by Jacobs (J) of its Critical Mission Solutions and Cyber & Intelligence government services businesses will become effective after the market closes on September 27. The spin-off is part of Jacobs’ previously announced plan to separate these businesses and merge them with Amentum in a Reverse Morris Trust transaction. Jacobs (J) will receive a $1 billion cash dividend at closing, plus additional value after closing, through disposition of a retained stake in the combined company.

The post Investors Balance Rate Elation Against Economic Worries appeared first on Up2info.com.

• Southwest Airlines’ aggressive expansion into new airports has backfired, leading to unprofitable routes and loss of cost edge, necessitating a scale-back for improved efficiency.
• The airline’s core operations remain strong, but uneconomic routes and poor ground service utilization have significantly impacted profitability.
• Management’s failure to adapt to market changes and rising costs has led to over-staffing and declining load factors, further hurting financial performance.
• Despite potential operational improvements, the airline sector’s low valuation multiples limit Southwest’s upside, making a profitable growth turnaround challenging.

Southwest Airlines (NYSE:LUV) has overextended itself in pursuit of growth. The company made a bald bet to expand while others were pulling back, this bet has backfired. Over the last 5 years, the airline has entered ~20 new airports most of which are still sub-scale and unprofitable.

The company was hoping to capitalise on the post-COVID aviation industry pull-back and push competitors out. The problem is that Southwest was too aggressive and seems to have lost its cost edge. The aggressive expansion is costing them dearly.

As it stands today, the best course of action for Southwest would be to scale down its growth ambitions for now and exit the airports where it is underperforming. Improved efficiency would also enable the business to return to gradual growth.

The main issue that we see is the valuation of airline stocks in general. The sector has disappointed investors for decades and even the best airlines seem to be trading at modest valuations. Value upside is therefore limited even if the turnaround is successful.

The main issue is uneconomic routes

Southwest was the darling of the sector for years due to rapid profitable growth but has lost its mojo as of late. It is now the least profitable major airline in the U.S.

It is important to point out that Southwest is primarily a point-to-point airline and their competitiveness relies on local economies of scale. The overall size of its network does not impact the cost competitiveness of Southwest. For this reason, the overall consolidated group operating numbers are not that useful in determining the efficiency of a point-to-point airline.

What matters is the market share at core airports and routes. Airlines want to keep their ground-based staff busy all day long and their aeroplanes flying in order to utilise their fixed cost base to the largest degree.

The consolidated operating metrics might have deteriorated, but Southwest still flies more than half of its passengers out of airports where it accounts for more than half of the volume. The operations of Southwest out of Dallas Lowe Field, Chicago Midway or Houston Hobby are still very profitable and very competitive.

The core business of Southwest is as strong as ever. The problem is that many new airports that Southwest has recently entered are still not generating profits and the business is having to use aggressive pricing to gain scale.

According to findings by Elliott, Southwest has increased its share of non-economic routes considerably. The negative effects of uneconomic flying are further compounded by poor ground services utilisation.

We support the view of Elliott Investment Management and believe that Southwest needs to take a step back before it can continue moving forward.

Southwest went on the offensive in 2020, but this risky bet backfired

As most airlines were reeling after the COVID lockdowns, Southwest made a bold bet to go on the offensive. The management did have good reasons for this, as Southwest had an industry-leading balance sheet. With the benefit of hindsight, it seems that management has moved too aggressively and ignored structural market changes.

Southwest has been adding airports to its service network throughout its existence and has grown from a scrappy upstart to the largest domestic carrier in the U.S. Unfortunately, it now is the least profitable major carrier in the U.S.

The growth of Southwest accelerated from about 2008 when Garry Kelly took the helm over from Herb Kelleher.

The new management team had decided to take advantage of the market pullback and went on the offensive. During the first decade of Keller’s reign, the aggressive growth strategy has done wonders for Southwest investors, as the share price has accumulated at an average of 31% per annum.

But something has changed thereafter. From 2018, the share price of Southwest is down by over 50%, even as the network has expanded by a further 70%. Over the last decade, growth did not create value, quite the contrary, – it has destroyed value.

It appears that the impressive Southwest run has attracted a number of copycats into the budget airline market. Over the last decade, Southwest has started facing stiffer price-based competition, especially in markets where it does not have a strong market share and scale advantages.

Some observers also claim that the legacy carriers have upped their game, while the leisure travellers have increasingly started demanding premium economy service.

Another issue that the budget airline industry has faced as of late is the rising cost of fuel. Budget airlines attract the most price-sensitive customers and in some cases they even create additional demand by offering considerably lower fares.

Fuel makes up a considerable share of the cost of flying. As oil prices rise, airlines have to pass on the higher cost, and as they do, they push the most price-sensitive customers out. As oil prices rise, the number of budget-conscious fliers declines. This negative effect is most pronounced for budget airlines as most of their customers are budget-conscious.

Overall, it would appear that network expansion did not improve profits over the last 5 years as low-cost seat capacity increased while the overall market has contracted due to premiumisation and the rising cost of fuel. The budget flying market seems to be oversupplied and Southwest has been expanding into it, no wonder that the profitability has plummeted.

Southwest operates a cost structure that does not match demand

The management of Southwest failed to foresee these new developments and went on to grow the business in a weak market. The fixed costs of the business have expanded considerably, but demand did not come and is not likely to come any time soon.

Salaries and wages are by far the most important cost item for Southwest. Labour efficiency is a key operating metric of any airline and when an airline over-hires, it becomes very difficult to maintain profit margins.

Over the last 5 years Southwest staff count has increased by 27% while seats flown have only grown by 12% and passengers flown by only 5%. It is quite clear that Southwest has too many employees. On top of this, the load factors have declined as Southwest is now flying more empty seats.

Click to enlarge

Financial statements and our estimates

What is more astounding is that load factors have declined even as pricing has stayed very competitive. Over the past 5 years pricing has increased by only 11% on average while the cost has grown by 35%.

As we mentioned before, the budget airline sector is quite price-elastic. If the airline is pricing aggressively by not passing on cost increases, we would expect them to attract additional travellers and grow market share. It was not the case this time round, as the market appears to be weak.

The ultra-low-cost airline sector in particular is struggling at the moment. Players are merging to optimise capacity and improve operating performance. Spirit Airlines (SAVE) is now facing potential insolvency after its merger with JetBlue (JBLU) was blocked. In a weak market that is not expected to improve soon, management should take action and start scaling down the cost base.

Free-ride with Elliott Investment Management

If you thought that it would be impossible for any executive to survive after delivering double-digit negative shareholder returns over a period of 6 years, you are mistaken, Garry Kelly is still the Chairman of Southwest.

To be frank, this executive did deliver extraordinary returns during his first decade at the helm and did deserve some credit from investors. However, 6 years is a long period of underperformance and if the old playbook is not working any more, new plays have to be drawn up. As the market has changed, maybe a fresh set of eyes is needed to guide the business.

As investors with a value bias, we encounter many businesses trading at low valuation multiples. Most of these are cyclical businesses with poor competitive positions, however, when a good business is cheap, management is usually the issue.

The management is not always easy to replace, however, especially the long-serving one. Independent directors usually do not have the willingness or the resources to engage in a battle with entrenched executives.

Activist investment funds are often needed to shake things up and Elliot Investment Management is one of the best in breed. The fund stands to gain when the performance of the company improves. Therefore, minority shareholders can free-ride on their efforts.

Activist campaigns do not succeed all the time, as performance attribution can be too vague, and the strategies suggested too aggressive. This is not the case with Elliott and Southwest. The airline has very clear issues, reflected in operating data, and the performance improvement can be tracked easily. The turnaround also mainly relates to underperforming airports, and the core operations will stay intact. We believe there is a good chance that Elliott will succeed.

A couple of weeks ago it was announced that Garry Kelly will retire next year and six directors will leave the board in November. The current CEO plans to remain in place.

Next week, on September 26th Southwest will host an investor day where it plans to put forward an operational improvement plan. This is probably the last-ditch effort by the current CEO Robert Jordan to keep his seat.

It remains to be seen if the plan proposed is aggressive enough and if it can put Southwest back on track. The pressure from Elliott could have been enough to enforce change. We will be waiting eagerly for the upcoming presentation.

The value upside of scale-back is limited

Southwest is currently significantly less profitable than before the pandemic. It can return to higher profitability, but some revenues will be lost. We believe that Southwest needs to exit unprofitable markets and the profits will improve as loss-making routes are closed.

On top of this, some planes will be freed up, allowing the company to monetise some of their property, plant and equipment. Southwest is a well-capitalised airline, and most of its planes are unencumbered.

The problem is that airlines do not command high valuations multiples in general. Before the pandemic, major U.S. airlines were trading at an average PE multiple of only 8x. Southwest was a notable exception, commanding a 12x PE due to its profitable growth in the past. The airline is now facing issues and probably should not trade at a premium to peers.

The capacity expansion since 2018 has yielded little value. Assuming that Southwest returns to the revenue and profit margin level of that year, the company should be able to deliver $2.5 billion of annual earnings. Assuming a rather conservative 8X earnings multiple, the equity would then be worth $20 billion. The equity value is only 15% higher than the market cap today, but there is one more value driver.

Throughout its operational history, Southwest has ploughed most of its earnings back into additional plane purchases to facilitate network expansion. Since 2018, the book value of Southwest has increased by close to $2 billion and the company has added 67 new planes to its fleet. Southwest is currently cycling out its older 737-700 aircraft, and a potential network scale-back would accelerate these efforts.

However, many airlines are currently trying to get rid of older and less fuel-efficient aircraft, therefore the value of these planes is not high. It is estimated that the older 700s probably cost about $5-$10 million a piece, therefore the spare planes of Southwest could be worth about $500 million.

Southwest cannot dispose of newer aircraft to remain competitive and the older planes are not worth much. Even after including the value of the spare planes, the upside potential appears to be rather small.

The success of Southwest’s turnaround depends on the ability of the business to convince markets that it deserves an above-industry average valuation multiple again. This would only be possible if the company was able to grow while operating profitably. In a competitive airline industry, this will not be easy.

For Southwest investors to yield attractive returns from this turnaround, a broader operational and strategic realignment is needed. Lower oil prices would also come in handy.

The bottom line

Southwest Airlines has made a bold bet that did not work out and is now suffering from the consequences. The company did grow to become the largest airline in the U.S. however, it has struggled to maintain profitability compared to other major carriers.

The company has overextended into an increasingly crowded and contracting budget market. It is now time to scale back the operations in unprofitable airports and return to higher levels of profitability. This will not be difficult to do.

It appears though that the markets are also seeing this as a sure bet and have already priced in higher margins going forward. There is not much upside left at the current share price.

Attractive shareholder returns would only be unlocked if Southwest was able to convince the markets that it could grow profitably again. This will be a lot more difficult than just cutting back on unprofitable routes.

At this point, we see no easy profits with Southwest’s turnaround.

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.

The post Southwest Airlines Is An Easy Fix, But It’s Not Necessarily A Buy appeared first on Up2info.com.

• Elliott Investment Management is pushing for significant changes at Southwest Airlines Co., including a new board, to improve shareholder returns.
• Southwest Airlines’ new strategy of assigned seating and premium options is considered incremental and insufficient compared to legacy airlines.
• Elliott’s plan could take 2–3 years to implement, with uncertain returns, while other airlines offer easier paths to stock gains.

Elliott Investment Management has pushed Southwest Airlines Co. (NYSE:LUV) to make corporate changes to drive improved shareholder returns. The airline struggled in the last decade as legacy airlines have improved operations and the business became stale. My investment thesis remains Bullish on the stock due to the cheap valuation, but the activist investor has simpler paths to solid returns in the sector.

Special Meeting

According to Reuters, Elliott now owns 11% of the outstanding shares, allowing the activist firm to call for a special meeting to replace BoD members. The company plans to meet with Southwest Airlines management on September 9 and has already proposed a new slate of 10 board members.

Elliott has a whole list of nominees for the board with relative airline industry experience. The major problem is the suggestion that a 10% owner should replace 67% of the board with new members, possibly loyal to the investment firm and not all shareholders.

The simple solution is to place a couple of these new members on the board, such as Michael Cawley, former Deputy CEO of Ryanair, and David Cush, former CEO of Virgin America. Without vetting each board nominee from Elliott, Southwest Airlines definitely has some solid choices to enhance the current board that has mostly overseen a decade of disappointment.

Elliott originally sought changes at Southwest Airlines back in June after making an initial $1.9 billion investment in the airline, leading to the ~11% economic interest. The airline has already announced major plans to shift the corporate performance with a move to assigned seats and premium seating options on all flights to capture more revenue per flight segment.

The investment firm has hinted at these changes being only half measures, but Elliott hasn’t provided any details on what else to change. The company wants a comprehensive review with new leadership, but investors need to understand the installation of new leadership and a review could take 6-12 months to develop.

The airline would need another 1 to 2 years to implement any changes. Investors would not see any returns for 2 to 3 years, at the earliest.

Southwest has the largest market share by passenger volumes, but the airline has a lot of low-fare tickets. Southwest might have 22% of the domestic passenger volumes, but the airline only has ~$27 billion in annual revenues, roughly half the legacy airlines.

The biggest problem facing Southwest Airlines is that the legacy airlines have figured out how to segment flights. Delta Air Lines, Inc. (DAL) and United Airlines Holdings, Inc. (UAL) now have more premium products in the front of the plane while leaving a section in the back with low-cost fares to match Southwest.

As Elliott mentions, the new plan for assigned seating and premium seats appears incremental and rushed versus a comprehensive view that keeps the low-cost airline unique in the sector. Southwest Airlines appears headed to joining the legacy airlines in similar domestic flight options.

Elliott Is Focused On Margins

The major issue with the Elliott report is that legacy airlines are now better operators. Outside the recent CrowdStrike Holdings, Inc. (CRWD) outage, Delta Air Lines has been the leading domestic airline for years now.

Elliott makes the assumption Southwest Airlines can just return to 20% EBITDAR margins like in 2018 while the legacy airlines aren’t donating market share anymore. Southwest could just offer low-cost fares with strong operations and mint money, but other low-cost carriers are even more competitive in prices.

If 86% of potential customers truly want assigned seating, Southwest is in no man’s land with the legacy airlines offering similar pricing with those options. Even worse, the major outage back during the last Christmas holidays questioned the operational ability of the airline.

If Southwest Airlines returned to 20% EBITDAR margins, the airline would produce somewhere slightly under $6 billion in 2025. The airline has a current market cap of $18 billion and Elliott forecasts the stock reaching $49 for a market cap of nearly $30 billion, or ~5x EBITDAR.

The projection is for the stock to rise 63% from here, but the legacy airlines could double on just the stocks hitting reasonable valuation multiples on already strong earnings. Both Delta Air Lines and United Airlines traded at only 4x to 5x EPS targets, and Elliott could have simply soaked up share supply and boosted the stocks in the process while advocating for higher valuations.

Southwest Airlines has to undertake a battle with an activist investor, find a more viable business solution than replicating the strategies of peers, and implement this plan. Elliott continues to take the hard path and a business solution might not even exist to return EBITDAR margins to prior levels.

Elliott estimates Southwest Airlines is only $38 with EBITDAR margins of 15%. The legacy airlines average around 15% margins, so the upside in the stock is limited to return to industry average margins. The real upside in the sector is the re-rating of the stocks.

Takeaway

The key investor takeaway is that Elliott Investment Management continues taking the hard path with Southwest Airlines. The investment firm is undertaking a lengthy process requiring a reshuffling of the BoD and a comprehensive business plan update that could take 2 to 3 years to implement. The airline stock is cheap, but investors have easier paths to stock returns via other airlines that don’t need to alter their business plans.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of UAL either through stock ownership, options, or other derivatives. 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.

The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock, you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.

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.

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• Activist investor Elliott Investment Management pushes for a reconstituted Southwest Airlines board and new leadership, aiming for a $49 share price.
• Durable goods orders rose 4.4% to $289.6 billion, driven by transportation equipment, but core durable goods slipped 0.2%, reflecting restrictive monetary policy.
• Oil prices surged due to geopolitical tensions and Libya’s force majeure on oil production, impacting global supply concerns.

Listen below or on the go on Apple Podcasts and Spotify.

Activist Elliott calls for Sept. 9 meeting with Southwest Airlines. (0:16) SolarEdge CEO steps down. (2:34) Stop & Shop to stop selling tobacco. (3:15)

This is an abridged transcript of the podcast.

Our top story so far. Activist investor Elliott Investment Management plans to meet with Southwest Airlines (NYSE:LUV) on Sept. 9.

“It is time for a reconstituted Board to finally step up and put in place a transparent and credible process for addressing the challenges Southwest faces today,” Elliott partner John Pike and portfolio manager Bobby Xu wrote in a letter to shareholders.

The latest Elliott comments come after the activist earlier said earlier this month that it plans to nominate 10 director candidates for the airline’s 15-person board.

Elliott has confirmed that it has a $2 billion stake in Southwest, and the activist pushed for the airline to do a business review, saying the airline stock can reach $49 a share. Elliott also called for new leadership, including the company’s CEO Bob Jordan and Chairman Gary Kelly.

On the economic front, July durable goods orders soared 9.9% M/M to $289.6 billion, easily topping the +4% rise expected and rebounding from a 6.9% plunge in June. The headline number has been up for five of the last six months. The big driver was transportation equipment, rising 34.8% to $102.2 billion as the volatility in aircraft orders persists.

Core durable goods, which exclude transportation equipment, slipped 0.2% M/M, falling short of the consensus for no change.

Wells Fargo economists said: “Over the past year, new orders of durable goods (excluding transportation) are up a meager 0.65%, which is the softest annual growth rate since January.”

“The stalling is illustrative of restrictive monetary policy and political uncertainty. These dynamics have underpinned a deferment mindset among businesses that are reluctant to take on major projects today.”

“Today’s data confirm the ongoing trend that manufacturers are largely standing idle until looser policy comes to fruition and supports broad-based order demand,” they added.

There was action in commodities, with oil rallying.

Brent (CO1:COM) rose above $80 per barrel, while WTI (CL1:COM) also gained following the weekend strikes between Israel and Hezbollah and concerns of an escalation conflict.

Also, Libya’s eastern government declared force majeure on all oil production and exports after its Tripoli-based rival moved to replace the leadership of the central bank. The eastern part of Libya is home to the Sirte basin, where most of Libya’s oil reserves and four of the country’s oil export terminals are located.

Among active stocks, SolarEdge Technologies (SEDG) announced that Zvi Lando has stepped down as its CEO, and has named previous CFO Ronen Faier as interim CEO. No explanation was given for Lando’s departure.

Lando joined SolarEdge in 2009 as Executive VP of Global Sales and became CEO in 2019.

Argus lowered its rating on Wayfair (W) to Hold from Buy on what it sees as muted prospects amid fewer home sales and the current environment of elevated interest rates.

Analyst Jon Staszak says: “We think earnings growth could be hindered given stretched consumers, less favorable operating leverage, and the need to reinvest profits in software used to compare W’s prices to those of its competitors.”

And retailer Stop & Shop announced that it will stop selling all cigarettes and tobacco products at its 360 stores by August 31. The grocery chain, which has stores across Massachusetts, Rhode Island, Connecticut, New York, and New Jersey, said the decision is part of the brand’s commitment to community wellness.

President Gordon Reid said: “Our responsibility as a grocer goes far beyond our aisles, and we are committed to taking bold steps to help our associates, customers, and communities work towards better health outcomes.”

In other news of note, Telegram has backed iCEO Pavel Durov, who was arrested on Saturday in France and is reportedly still being detained for questioning, with the messaging platform saying he has “nothing to hide.”

The Russia-born billionaire was arrested at Le Bourget airport near Paris as part of an investigation into an alleged lack of moderation on Telegram, which police claim has allowed criminal activity – including crimes against minors, to go on undetected on the app.

The company said it “abides by EU laws, including the Digital Services Act – its moderation is within industry standards and constantly improving. Durov has nothing to hide and travels frequently in Europe. It is absurd to claim that a platform or its owner are responsible for abuse of that platform.”

Toncoin, the token of Telegram-linked The Open Network, dropped more than 20% soon after the arrest but has since cut losses.

And in the Wall Street Research Corner, Goldman Sachs has released its reports on the holdings of 693 hedge funds with $2.8 trillion of gross equity positions ($1.8 trillion long, $1.0 billion short) and 554 mutual funds with $3.7 trillion of equity assets.

Strategist David Kostin says “34% of large-cap mutual funds have outperformed their benchmarks YTD, down from 50% in May and below the historical average of 38%.”

And Goldman Sachs Prime Services “estimates that US equity fundamental long/short hedge funds have returned +9% YTD, boosted by alpha from popular longs and concentrated shorts.”

There are eight stocks that appear in Goldman’s Hedge Fund VIP List (based on the number of funds where the stock is in the top 10 positions) and are also overweight in mutual funds.

Those are CRH (CRH), Progressive (PGR), Visa (V), Fiserv (FI), Uber (UBER), Workday (WDAY), Mastercard (MA), and UnitedHealth (UNH).

The post Wall Street Lunch: Elliott Investment To Meet Southwest Airlines appeared first on Up2info.com.