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?