Southwest Airlines Co (NYSE: LUV) is facing a turbulent start to the day, with its stock trading down 4% in pre-market trading.
The sharp decline comes after the company revised its Q2 2024 revenue forecast, expecting a year-over-year decline in revenue per available seat mile (RASM) of 4.0% to 4.5%, compared to the previous estimate of a 1.5% to 3.5% decline.
This revision is largely attributed to the complexities in adapting its revenue management to current booking patterns.
Despite the lowered revenue expectations, Southwest Airlines highlighted strong operational performance for Q2, maintaining a high completion factor of 99.5% amidst challenging weather conditions in Texas and Florida.
The company said it continues to focus on improving financial results and enhancing shareholder value through various strategic initiatives aimed at operational excellence and enhancing customer experience.
Pressure from activist investors
Southwest Airlines is currently facing significant pressure from activist investors. Artisan Partners and Elliott Investment Management have urged the board to reconstitute itself and upgrade leadership.
Elliott, which holds a $1.9 billion stake in Southwest, is pushing for new leadership, including replacing CEO Bob Jordan and Chairman Gary Kelly, and believes the stock could reach $49 per share with the right changes.
Fundamental business performance
Fundamentally, Southwest Airlines has faced challenges in recent years. The stock has lost 44% of its value over the last five years.
Issues such as the holiday meltdown in late 2022, where over 16,000 flights were canceled, have highlighted the need for operational improvements.
Additionally, Southwest’s focus on the Boeing 737 model has turned into a bottleneck problem, exacerbated by delays in Boeing’s latest 737-MAX model deliveries.
For its Q1 2024, Southwest Airlines reported an EBITDAR margin significantly lower than historical levels. The airline’s shift from best-in-class EBITDAR margins in 2018 to much lower levels in recent years reflects the competitive pressures and operational inefficiencies it currently faces.
Analysts’ views and valuation
Analysts have mixed views on Southwest Airlines. While some see potential in the company’s strategic initiatives, others remain cautious due to ongoing operational challenges and competitive pressures from legacy airlines like Delta and United.
Recently, Raymond James analyst Savanthi Syth noted that activist Elliott Investment Management’s acquisition of nearly $2 billion in Southwest Airlines shares was expected.
“We anticipated activist interest in Southwest due to its robust franchise, valuable assets like its brand, loyalty program, co-branded credit card, fleet, network, and a uniquely strong balance sheet among U.S. airlines,” Syth commented in a report.
Syth also pointed out that Southwest could improve its technology and introduce features it currently lacks, such as red-eye flights.
Currently, analysts at Raymond James have an ‘Outperform’ rating on Southwest’s stock with a $30 price target.
From a valuation perspective, Southwest Airlines trades at a higher multiple compared to its peers, reflecting expectations of a turnaround.
While Elliott Management believes there is significant upside potential in the stock that can take it to $49, this valuation is contingent on the successful execution of strategic changes and operational improvements.
As Southwest Airlines navigates these turbulent times, the question remains whether the stock represents a buying opportunity at current levels. To answer that let’s turn our attention to the charts.
Current dip: A buying opportunity for bulls
Southwest’s stock has seen a long-term downtrend since April 2021, when it was trading above $60. The stock has continued making lower lows and lower highs since then.
However, not all hope is lost for the bulls. After making its swing low at $21.92 in October last year, the stock hasn’t gone below that level showing some strength in the medium term.
Hence, investors who are optimistic about the company’s future prospects can purchase it following today’s dip with a stop loss a few cents below the recent swing low at $24.6.
If the stock manages to bounce back above March highs near $35, it can reach the 50% Fibonacci retracement from 2021 highs and 2023 low near $43.3, where one can book profits.
Traders who continue to remain bearish on the stock must refrain from shorting it unless it falls below the recent swing low at $24.6 because buying on dips can emerge due to the involvement of activist investors.
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