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Cowen’s Helane Becker called Southwest her top pick for 2021, seeing “significant upside” in the shares.
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Spirit Airlines
’ warning that ticket sales are weakening is another sign that travel is taking a hit from the spike in Covid-19 cases.
Yet
Southwest Airlines
(ticker: LUV) is getting more love from Wall Street. Cowen’s Helane Becker raised her price target on the stock on Tuesday and called Southwest her top pick for 2021, seeing “significant upside” in the shares.
Spirit’s (SAVE) sales warning wasn’t a surprise. Consumers are scaling back on travel as Covid cases spike to nearly 200,000 a day in the U.S., prompting states to reimpose restrictions on business and travel. Health experts warn that the next few months will be worse as the virus spreads due to holiday travel and as the U.S. refrains from imposing strict lockdowns.
Thanksgiving air travel was strong, with more than 4 million passengers taking flights around the holiday. But travel fell back to less than 1 million passengers a day this week, less than half of 2019 levels around this time of year.
The rise in Covid cases is taking a toll on bookings, as is the broader economy. Spirit said in a filing on Tuesday that rising Covid case counts have resulted in a “deceleration of bookings and an uptick in cancellations,” adding that it continues to see “significant pressure on ticket revenue.”
Spirit said its planes are likely to be 70% full in the fourth quarter, up from 68% in the third quarter, even as the airline increased capacity. But the company added that it expects to burn through $2 million a day in the quarter and hiked its expected operating losses, going from a range of minus 9% to 14% to a range of minus 15% to 20%.
But Wall Street is still pinning hopes on a strong recovery next year as coronavirus vaccines are distributed in the U.S. and abroad, and air travel gets a big lift from pent-up demand. If that scenario pans out, Southwest should be a big winner, according to Becker, who raised her target on the stock to $55, implying gains of 17% from recent prices around $48.
Southwest won’t just benefit from a rebound in its core leisure market, she argues. The airline’s industry-leading balance sheet has helped it avoid the steep job cuts and dilutive equity issuance that other carriers have needed to make it through the pandemic. And while Southwest isn’t expected to expand its fleet, it should gain market share from carriers that grounded planes and downsized.
“We expect the company to return to 2019 profit levels quicker than others given their better balance sheet, share gain opportunities, and low hanging fruit on cost savings,” Becker writes, expecting Southwest to hit those goals in 2023.
One other big catalyst for Southwest is the return of
Boeing’s
(BA) 737 MAX plane, which was recently recertified by regulators to resume commercial flights. Southwest is the largest U.S. passenger operator of MAX aircraft and had grounded 34 MAX planes in its fleet.
Getting the MAX back in the air should relieve a big hole in revenue. Becker estimates that the grounding cost the airline $828 million in operating income in 2019 alone. Southwest has also ordered another 249 MAX planes, which are relatively fuel-efficient and should lower operating costs compared with older aircraft.
Southwest’s stock isn’t cheap, though, at 16 times 2022 earnings. It trades at multiples that are 50% to 60% higher than peers like
Delta Air Lines
(DAL) and
United Airlines Holdings
(UAL), and it’s 33% above Spirit at 12 times earnings. It’s also pricier than another well-positioned leisure carrier,
Allegiant Travel
(ALGT), at 14 times estimated 2022 profits.
At Becker’s $55 target, Southwest would trade at 18 times adjusted 2022 earnings of $3.01 a share, according to consensus estimates. That would be well above its five-year average price/earnings ratio of 11.7 times forward earnings.
The premium might be warranted if Southwest can execute against a backdrop of soaring travel demand. But it assumes that quite a few stars line up perfectly.
Write to Daren Fonda at daren.fonda@barrons.com
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