Southwest Airlines Was ‘Let Down’ by Boeing, Analyst Say

 

Southwest Airlines stock is trading down on Tuesday, following a downgrade by Evercore ISI, which lamented that the company is “a growth airline that has invested for growth, yet can’t grow.

Southwest stock (ticker: LUV) is up 8.5% year to date, but has fallen nearly 5 percent in the past 12 months.

Airlines in general have turned in a fairly mixed performance in 2019: Although no major players have managed to keep pace with the market, the level at which they’ve lagged as varied, in part due to their exposure to Boeing ’s (BA) MAX 737.

That’s not surprising given that after March’s deadly Ethiopian Airlines crash, the aircraft has been out of service for months, which has caused big disruptions to airlines, like Southwest, that have fleets that are heavily reliant on the planes. Southwest has held up better than some, but is still feeling the pinch. That left the stock with a market-trailing year-to-date gain, despite raised dividends and rumors that Warren Buffett might be interested in buying the company.

On Tuesday, Evercore analyst Duane Pfennigwerth downgraded Southwest to In Line from Outperform, with a $60 price target, and removed the shares from the firm’s Best Ideas list. He writes that the move comes as Southwest was “let down by its key partner,” leaving them “likely rangebound” in the near term. 

“Southwest is not just any Boeing customer. By betting on the MAX as its longer-term growth platform, Southwest effectively validated the technology, supporting Boeing’s global sales efforts.” Yet the only thing it’s received in return, he writes, is operational headaches, a pall over what was an otherwise upbeat revenue narrative in 2019, lost market share, and probable impact to its otherwise highly rated brand.

He notes that while Southwest has invested in growth, that hope is evaporating with the Max grounding, leaving the company is a “holding pattern” that is likely to affect its stock as well.

Looking ahead. It’s not that Pfennigwerth doesn’t believe in the Southwest story—he still likes the company’s strong free cash flow, unimpeachable balance sheet, and shareholder friendly policies. Yet he doesn’t see the stock going anywhere until the Max 737 is in the air again.

On a positive note, that robust balance sheet is certainly coming in handy. Among legacy carriers, Delta Air Lines (DAL) might actually benefit from the Boeing debacle, as its fleet is relatively insulated, and its shares reflect that optimism. Contrast that with United Continental Holdings (UAL) and American Airlines Group (AAL), which both have just under 2% of their available seat miles exposed: The former is off just 4.5% this year, while the latter has tumbled 11%, in part due to earnings and guidance, but also because American is working off a heavy debt load that makes it less flexible than peers. The fact that Southwest has nearly 9% of its capacity on the 737 MAX and has managed to hold on to gains in 2019 speaks to the other tailwinds, including its cash position and strong management.

Yet the timing isn’t great for Southwest either, given that 2019 is the year of its long-awaited push into the Hawaiian market, and comes after the government shutdown cost it millions in lost revenue.

Ultimately, the shares will likely get a boost when the 737 MAX is finally cleared for takeoff again; the question is how sustainable that bump is, and how quickly Southwest can get back to speed, and whether investors believe its growth strategy can ramp up again without further hiccups.

Southwest is down 1.6% to $50.36 in recent trading.