Southwest Airlines’ shares rose over 4% Friday, after JP Morgan gave the airline a rare two-upgrade. The analyst cited growing investor confidence in a better earnings outlook that could change expectations before results are released later this month.
Analysts raised their ratings and price targets to $60, up from 36 cents. This represents a 40% increase from the close on Thursday.
JP Morgan stated that the rally is driven more by Southwest’s 2026 guidance than by earnings in near term.
Jamie Baker, an analyst at Investec Securities said that a forecast of earnings per share of $5 in that year looks “attractively likely.” This figure would be far higher than the market consensus estimate of $2.98.
Baker said that such an outlook could easily outperform its peers, and reignite the debate about the strength of Southwest Airlines’ business, despite the fact that the domestic market is still challenging.
Analysts warned that the market might initially resist a target for EPS, due to Southwest’s inconsistent history of providing guidance. Southwest has also relied on other metrics in its past rather than earnings-per-share.
Southwest’s story is changing
Southwest Airlines has traditionally avoided giving EPS guidance and instead prefers to measure revenue per seat-mile.
Recent strategic changes may mean that these metrics no longer reflect the whole picture.
Air Canada has launched a number of initiatives to increase revenue, such as the controversial decision that it would end its “bags are free” policy. It will also be moving away from an open seating arrangement.
JP Morgan believes Southwest will begin to guide investors by using the EPS in 2026, which is a good starting point.
JP Morgan analysts stated that the pending switch to an EPS guide had sent them back to drawing boards.
Baker stated that the confidence in Southwest stems from its earlier guidance, which has been withdrawn. Southwest had previously projected earnings before taxes and interest of $3.8 billion by 2026.
Analysts expect an EBIT of $3 billion. This is well over the $1.9 billion consensus estimate, translating to roughly $5 per share.
They said that even a guide price of $4.50 could justify a significant revaluation towards their $60 goal.
Stocks outperform peers by 2025, despite profits slump
Southwest Airlines was one of the top US airlines stocks in the last 12 months, as its shares have risen over 30%.
American Airlines’ shares have fallen by approximately 11%, compared to gains of around 16% at Delta Air Lines.
The company’s performance is impressive despite the sharp drop in profitability.
Southwest Airlines’ profit for the first nine-month period of this year fell by 42%. This shows the disparity between the near-term financial pressure and the investor optimism surrounding its transformation plans.
Analysts believe the resilience of this stock is due to company-specific reasons, rather than an overall recovery in demand for airlines.
Savanthi Syth is an airline analyst with Raymond James. She said that the initiative, and not the environment, was what helped Southwest’s stock.
Take shape for revenue initiatives
Southwest Airlines will begin a major part of this transformation on January 27, 2019, when it will officially abandon the open-seating policy in its Boeing 737 aircraft.
Airline will sell extra legroom in front row seats at premium prices.
Southwest estimates that extra legroom and assigned seating options can generate $1 billion pre-tax in earnings in the next year, and $1.5 in 2027. This will provide a major boost in profitability.
Even after Friday’s rally there is still skepticism.
Data compiled from LSEG shows that 26 analysts have rated the stock as a Hold on average. The median price target is $42, indicating the market has not yet agreed on the extent to which the turnaround was already priced.
The post Southwest Airlines Shares Jump as JPMorgan Double-Upgrades and Sees $5 EPS By 2026 could be updated as new information is revealed
