Southwest Airlines stock fell after Goldman Sachs downgraded it to Sell from Neutral, writing that medium-term inflation pressure is expected to “drive aslower-than-industry return to profitability.”
The stock dropped 3.8% to $41.97 on Friday.
Goldman Sachs lowered its price target on Southwest (ticker: LUV) to $36 from $59.
The analysts wrote in a research note that higher costs at Southwest have, in part, been “driven by investments in upgrading its technology in addition to its entrance into the GDS’s and expansion into higher cost airports.” Southwest recently partnered with Sabre (SABR) to offer more business travelers the ability to book flights through Sabre’s global distribution system.
In addition to headwinds from GDS fees, Southwest also faces structural cost increases driven by increased minimum wages, the analysts said.
“This inflation will drive a slower-than-industry return to profitability as we expect revenue benefits from these initiatives will be offset by a weaker domesticpricing environment,” Goldman Sachs said.
“We continue to view Southwest as one of the highest quality companies in our coverage and believe that these investments will ultimately improve the company’s margin profile in the long-run,” Goldman Sachs said.
“However, as the recovery continues over the next 12 months and we/investors focus more on margin recovery differentiation as opposed to ability to withstand the pandemic (e.g., exposure to faster recovering demand segments, balance sheet strength, etc.), we believe Southwest’s slower return topre-pandemic profitability will result in LUV shares underperformingour airline coverage universe.”
Southwest earlier this week boosted its fourth-quarter revenue forecast and reduced fuel cost estimates. The airline said operating revenue would fall 10% to 15 % vs. the fourth quarter of 2019, compared with previous estimates of a15% to 25% decline.
Airline stocks have been under pressure this week from increasing Omicron concerns. Shares of American Airlines AAL, United Airlines and Delta Air Lines each were trading about 1% lower Friday.
Write to Karishma Vanjani at [email protected]
