Southwest Upgraded At Buckingham Research; Firm Sees 31% Upside

In a report published Wednesday, Buckingham Research analyst Daniel McKenzie upgraded the rating on

from Neutral to Buy, while reducing the price target from $45 to $43. Southwest Airlines' revenue and earnings outlook has improved in the wake of the reduction in competitive capacity in key markets. The ongoing rationalization of the overcapacity in the US Airlines industry is expected to benefit Southwest Airlines. "…AAL has eliminated over 2.2M seats from 2H15 schedules, primarily at Dallas (#6 market for LUV based on seats), as well as Chicago (LUV's #1 market). Specifically, where overlap exists with LUV at Dallas, competitive seats from AAL have declined 2.8% pts in 3Q15 (leaving AAL's growth up 1.4% YOY)," analyst Daniel McKenzie said. Southwest Airlines is facing steady demand, as reflected by the $3-$8 fare hike. Revenue volatility is expected to ease if the company reconsiders its 2016 growth plans against the Federal Reserve's reduced economic outlook for this year and the next. This in turn would enhance the company's goal of growing pre-tax earnings. "Finally, a large portion of next year's growth results from more efficient, 175-seat 737-800s replacing 137-seat 737-300s - a potential source of nonfuel CASM surprise in our model," McKenzie wrote. The EPS estimates for 2015 and 2016 have been reduced from $3.41 to $3.26 and from $3.20 to $3.05, respectively, to reflect economic weakness and inflationary contracts for pilots and flight attendants.