1. Southwest Airlines Co. (NYSE:LUV)
Average Analyst Price Target Upside as of September 16: -12.40%
Number of Hedge Fund Holders: 23
Southwest Airlines Co. (NYSE:LUV) is a major passenger airline operating scheduled flights across the United States and several international destinations. With a fleet of over 800 Boeing 737 aircraft, the airline serves nearly 120 destinations domestically and 10 international countries, including Mexico, Costa Rica, Belize, Jamaica, and others.
The airline’s financial performance has been pressured by delays in aircraft deliveries from Boeing, which have worsened cost issues. The ongoing industry-wide overcapacity in the domestic market has led to pricing pressures and lower airfares. The company is in discussions with Boeing regarding compensation for these delays, which may come in the form of price reductions.
It tops our list of the worst aviation stocks to buy according to analysts. Out of 21 analysts, 12 have given the stock a Hold rating, 2 keep an Underweight rating and 4 have a Sell rating on it. The average price target of $25.00 implies a downside of 12.40% from the present levels, as of September 16.
Despite the challenges, in the second quarter, the company achieved a new revenue record of $7.35 billion, which is nearly a 5% increase from the same period in 2023. The growth was driven by a strong demand for air travel. However, despite this revenue boost, the company’s adjusted net income dropped by 51% to $370 million, or $0.58 per share.
The decline in earnings was partly due to a 3.8% decrease in unit revenue compared to the second quarter of 2023. The drop was influenced by a greater increase in domestic capacity relative to the demand, leading to revenue management issues. The airline also faced challenges from selling too many seats too early for the busy summer travel season, which negatively impacted revenue.
Southwest Airlines (NYSE:LUV) has projected capital expenditures of around $2.5 billion for 2024, including about $1 billion for aircraft purchases. The company expects to take delivery of approximately 20 to 28 aircraft this year and to continue making payments for its 2025 aircraft orders.
For the third quarter, it expects a potential 2% decline in unit revenue year-over-year and expects nonfuel costs to rise by up to 13%. These higher expenses could continue to weigh on the airline’s financial performance through the end of 2024.
However, on September 3, Evercore ISI analyst Duane Pfenningwerth upgraded Southwest Airlines (NYSE:LUV) to Outperform from In Line rating with a price target of $35, up from $30. The upgrade shows anticipated improvements in capacity management and new revenue initiatives that the company plans to unveil, such as assigned seating and premium economy options. The analyst also noted the strong underlying value of the airline’s fleet, which may become more apparent through future transactions.
In the second quarter, 23 hedge funds held positions in Southwest Airlines (NYSE:LUV), worth $429.489 million. As of Q2, Elliott Management is the most dominant shareholder in the company after it initiated a position and has a stake worth $171.660 million.
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