Shares in Southwest have sold off as investors consider whether the airline, which said it will grow capacity about 7% during the rest of the year, is growing too fast.
"In our view, the Southwest story is misunderstood," wrote Imperial Capital analyst Bob McAdoo, in a report issued Wednesday. "Southwest shares may be the most attractive of the big four U.S. carriers over the next several months."
Southwest shares closed Wednesday at $34.35, down 23 cents. Year to date, shares are down 19%. McAdoo has a price target of $64. In 2014, Southwest gained 124% and was the top performer in the S&P 500.
Most of Southwest's growth is coming at Love Field and Washington's Reagan National Airport, where the carrier has added 177 new weekly departures. Additionally, following the 2011 acquisition of AirTran and the slowest merger in airline history, Southwest continues to replace AirTran flying.
"As with opening a new branded retail store, Southwest has used promotions and temporary price discounting in new markets to attract consumer attention," McAdoo said. "Established incumbents have typically responded by matching some or all of LUV's fares."
But as in retail, promotions come and promotions go. "We expect substantial operating margin improvement as new routes mature," McAdoo wrote. "Our price target is about 85% above the recent share price."
Why will Southwest shares rise faster than other airline shares?
McAdoo said recent weakness in passenger revenue per available seat mile (PRASM) at the big three global carriers -- American (AAL) - Get Report , Delta (DAL) - Get Report and United (UAL) - Get Report -- is driven partially by the impact of competition from Southwest.
At each of the three, Southwest competition impacts 5% to 7% of flights.
An additional benefit for Southwest is that the carrier has removed weaker flights from its system, which should also result in PRASM gains, McAdoo said.
A May 26 story on TheStreet titled "4 Biggest Mistakes Wall Street Makes When It Looks at Airlines" reflected similar views.
However, not everyone has as much confidence in Southwest.
On Thursday, Stifel analyst Joseph DeNardi reduced his price target to $50. DeNardi also cut his second-quarter earnings estimate to $1 a share, his third-quarter estimate to 85 cents and his full-year estimate to $3.25. Analysts surveyed by Thomson Reuters estimate earnings of $1.02 a share in the second quarter, 87 cents in the third quarter and $3.34 for the full year.
DeNardi noted that management recently lowered its second-quarter PRASM projection: Southwest now projects a decline between 4% and 5%, worse than previous guidance of down 3%, due to recent weakness in close-in yields, growth in stage length growth and a tough comparison.
"We also suspect the revision is due to ... capacity growth, weaker demand from oil-related corporate accounts and pricing pressure in Chicago and Dallas," DeNardi wrote.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.