Buckingham Research: Southwest Has 31% Upside

• Shares of Southwest Airlines Co LUV have gained nearly 30 percent over the past six months.
• Despite the strong recent gains, Daniel McKenzie maintained a Buy rating and $57 price target on Southwest's stock.
• The analyst offered several catalysts that can result in earnings per share upside in 2016.

Southwest Airlines' stock still has room to grow despite a near-30 percent gain over the past six months, at least according to Daniel McKenzie of The Buckingham Research Group. McKenzie noted that Southwest extended its schedules through August 5 of next year (from June 3) which offers the first "credible" look at the company's summer capacity and potential revenue trends. The analyst noted that at this point, second quarter 2016 growth is coming in 380 basis points less than expected but it is too early to draw any "firm" conclusions. Related Link: Tilson After Buying Spirit Airlines Stock: I Flew Airline And Here's What Happened McKenzie continued that the company's 2016 capacity is trending closer to 5 percent (than 6 percent) which suggests "modest" PRASM (passenger revenue per available seat mile) upside to his 2016 earnings per share estimates. The analyst added that while Southwest doesn't provide much detail concerning its oil hedges, there is an estimated 15 percent upside to his 2016 pre-tax earnings outlook, or $0.65 per share. Moreover, a potential $2.5 billion return of capital to shareholders could yield a $0.30 per share boost to the company's earnings per share – thereby created a total potential upside of $0.95 per share, or $12 to the stock. Bottom line, shares of Southwest have dipped 12 percent from its recent highs and its current stock price implies a 10.1x valuation on the analyst's 2016 earnings per share. As such, the analyst suggested that the stock is "attractive in light of improving fundamentals." Shares remain Buy rated with an unchanged $57 price target.