Southwest Airlines Co. (LUV), the world’s largest low-cost carrier, operates in the United States and nearby international markets, providing scheduled air transportation services. The Dallas, Tex.-based company operated a fleet of 718 Boeing 737 aircraft and serviced 107 destinations in 40 states as of December 31, 2020.

LUV’s shares have declined 23.5% in price over the past six months and 11% over the past month to close yesterday’s trading session at $47.24. Furthermore, the company is currently trading 27% below its 52-week high of $64.75, which it hit on April 14, 2021. Though the aviation industry is steadily climbing out of its pandemic blues, concerns over air travel's contribution to climate change and rising oil prices threaten to stifle the sector's growth.

In addition, LUV’s operational inefficiencies and poor profitability could cause its share price to retreat further in the near term.

Here’s what could influence LUV’s performance in the upcoming months:

Business Headwinds

Between October 8 and October 13, Southwest canceled almost 2,000 flights. Also, the airline reduced its December capacity to 92% of its capacity in the same month last year, down from a plan two years ago to fly 95% of its schedule. According to the company, the cancellations were due to air traffic control issues, a lack of labor in Florida, and adverse weather conditions.

In addition, oil prices have surged to multi-year highs, threatening the aviation industry’s pace of recovery.

Poor Profitability

LUV’s trailing-12-months EBIT margin and Levered FCF margin are negative 21.1% and 1.02%, respectively. Also, its 0.35% asset turnover ratio is 54.8% lower than its 0.78% industry average. Furthermore, its 0.01% trailing-12-months net income margin is 99.9% lower than the 5.9% industry average.

Consensus Rating and Price Target Indicate Potential Upside

Of the 15 Wall Street analysts that rated LUV, 13 rated it Buy, and two rated it a Hold. The $61.86 12-month median price target indicates a 31% potential upside from yesterday’s closing price of $47.24. The price targets range from a low of $48 to a high of $75.

Unfavorable POWR Ratings

LUV has an overall C rating, which equates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. LUV has a D grade for Stability. The stock’s 1.2 beta is in sync with its Stability grade.

The stock also has a C grade for Momentum. This is justified, given that the stock is currently trading below its 50-day and 200-day moving average of $50.27 and $54.48, respectively.

Of the 31 stocks in the F-rated Airlines industry, LUV is ranked #7.

Beyond what I’ve stated above, we have rated LUV for Sentiment, Growth, Quality, and Value. Get all LUV ratings here.

Bottom Line

Despite being a dominant low-cost airline operator, LUV has struggled to deal with operational inefficiencies, leading to its worst on-time performance. This, coupled with its lower-than-industry profit margins, could lead its stock to a further price decline. Thus, we think investors should wait until LUV addresses its challenges before investing in the stock.

How Does Southwest Airlines Company (LUV) Stack Up Against its Peers?

While LUV has an overall POWR Rating of C, one  might want to consider looking at its industry peers, SkyWest Inc. (SKYW), China Eastern Airlines Corporation Ltd. (CEA), and China Southern Airlines Company Ltd. (ZNH), which each possess an overall B (Buy) rating.

LUV shares were trading at $46.95 per share on Friday morning, down $0.29 (-0.61%). Year-to-date, LUV has gained 0.73%, versus a 23.49% rise in the benchmark S&P 500 index during the same period.

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.

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