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Southwest Scores in Turbulent Market

The airline's consistent performance wins props from analysts.

In uncertain times, it is often wise to stick with the tried and true.

That undoubtedly includes


(LUV) - Get Southwest Airlines Co. Report

, which has reported 34 consecutive years of profitability. Cathay Financial analyst Susan Donofrio recently reiterated an outperform rating on the shares, while Prudential analyst Bob McAdoo upgraded the shares to overweight from neutral. JP Morgan analyst Jamie Baker also has an overweight rating.

"With geopolitical concerns and rising fuel prices weighing on airline investors' minds, we thought it would be prudent to highlight a stock that is well-positioned to weather high fuel prices and a potential slowdown in the economy," Donofrio wrote in her report.

"Given Southwest's low cost structure, minimal exposure to volatile international markets, and ample fuel hedges, we believe the airline should continue to post stable and consistent earnings growth," she said. Cathay Financial says it had no investment banking conflicts involving the shares, and Donofrio has no financial interest.

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Donofrio estimates 2007 per-share earnings at 93 cents and sets a 12-month target share price of $21. The mean projection for 2007 EPS by 16 Thomson Financial analysts is 92 cents, with a range of 80 cents to $1.06.

Southwest on Tuesday reported that its load factor fell by 1.7 points in February and said March bookings are soft. Bookings were "impacted by inclement winter weather conditions, primarily in the Northeast and Midwest regions of our system," said CEO Gary Kelly, in a prepared statement. "Bookings for March are a little soft, suggesting our March 2007 load factor may fall below last year's record load factor of 75.5%."

In a report, Baker wrote that he interpreted the statement to be "a warning as to the un-achievability of Q1 consensus, and are dropping our estimate accordingly." Baker estimated 2007 EPS estimate to 85 cents, down from 87 cents. He dropped his first-quarter estimate to 6 cents, down from 8 cents, and said he expects share price pressure as analysts reduce estimates.

Still, Baker maintained his overweight rating. "Southwest remains our lowest-risk idea in the space, trading at multi-year valuation and leverage lows," he wrote. JP Morgan has a financial relationship with Southwest that includes providing investment banking and securities-related services.

Southwest shares were trading around $15 Tuesday, down 0.6% for the day and down about 1.5% since the start of trading this year. Meanwhile, the Amex Airline Index has declined about 8% so far in 2007.

Meanwhile, McAdoo set a 12-month target price of $22. At roughly $15 a share, Southwest has a price-to-earnings ratio of 15, based on his 2007 per-share earnings estimate of $1.01. "Except during September 2001, this is approximately its lowest P/E since February 2000," McAdoo wrote. "During every year since 1997, Southwest has traded at least at 20 times current year estimates."

McAdoo noted that last year, Southwest shares peaked at $18.20 after the airline reported second-quarter results. "We expect a stronger June 2007 quarter, driven by $60-ish oil prices, less total-industry Florida capacity, but with more LUV capacity in Florida, and today's somewhat higher fares," he wrote.