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'Misunderstood' Southwest Will Outperform Market And May Be Best Of The Big Four Airliners, Imperial Capital Says

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In a report published Wednesday, Imperial Capital analyst Bob McAdoo maintained an Outperform rating on Southwest Airlines Co (NYSE: LUV), with a price target of $64.

Southwest reported revenues of $18.8bn, EBITDA of $3.9bn, and EPS of $2.50 for the 12-month period ended March 31, 2015. At that time, the company had $4.0bn in cash and cash equivalents as well as $2.7bn in long-term debt outstanding.

Southwest's shares, along with those of other US airlines, have been under pressure in recent weeks, with investor concern surrounding lower unit revenues, or RASM, driven partly by the capacity additions this year. However, investors seem to have forgotten that "earnings will be at record levels on lower fuel costs," analyst Bob McAdoo said.

In the report Imperial Capital noted, "Southwest has added flights in Dallas, Washington, DC and elsewhere while reducing flights elsewhere across its system including presumably many of its worst routes. We expect substantial operating margin improvement as its new routes mature."

While Southwest has been feeling the heat from the media, analysts and investors alike for its seat mile growth, "which some see as damaging industry-wide RASM." McAdoo believes, however, that "the Southwest story is misunderstood."

"LUV shares, upon closer inspection, may be the most attractive of the big four U.S. carriers over the next several months, in our view," McAdoo commented, while adding, "With more than 20% of its flying in new markets, but RASM down only 5%, LUV may see the most resilience in RASM and share price as newer market promotional fares subside."

Latest Ratings for LUV

Oct 2016BernsteinInitiates Coverage OnOutperform
Sep 2016Imperial CapitalInitiates Coverage onOutperform
Jul 2016JP MorganDowngradesOverweightNeutral

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