TD Cowen downgraded Southwest Airlines (NYSE:LUV) stock and lowered its estimates for the carrier’s 2024 earnings per share following the company’s Q3 profit report.

Shares of LUV fell by 4.3% to $22.39 in late afternoon trade, reaching their lowest point since March 2014.

Southwest (LUV) reported a 24.1% YoY decrease in Q3 net income due to rising fuel and labor costs. The airline also mentioned a decrease in capacity going forward.

According to TD Cowen analyst Helane Becker, “Southwest (LUV) reported adjusted 3Q profit that was better than our forecast but below consensus. Revenue of $6.25B was below estimates. Management is focused on improving results and will reduce capacity growth. Investors are concerned about balance sheet destruction, overcapacity, high costs, and lower yields.”

As a result, TD Cowen downgraded LUV stock from Outperform to Market Perform.

Becker added, “Pre-pandemic, Southwest (LUV) consistently saw strong revenue growth and double-digit operating margins. They historically used downturns to grow and take market share. This time it’s different: a lack of a premium product, too much capacity in business-focused markets, no significant international exposure, and high costs going higher have convinced investors that the model is broken.”

Furthermore, the analyst reduced LUV’s earnings per share estimate for 2024 to 54 cents from $1.49 previously, significantly below the consensus EPS estimate of $2.18.

During the earnings conference call, Southwest Airlines (LUV) CEO Robert Jordan stated that the company is carefully evaluating the current macroeconomic environment and post-pandemic travel trends to create the best plan for the future.

Wall Street analysts, SA Authors, and Seeking Alpha’s Quant system all have a Hold rating on Southwest Airlines (LUV) stock.

Further Insights on Southwest Airlines

**Keywords**: Southwest Airlines stock, stock downgrade, Q3 earnings, capacity reduction, TD Cowen analysis, premium product, international exposure, earnings per share estimate.

The Decline of Southwest Airlines Stock

Southwest Airlines (NYSE:LUV) recently faced a significant blow as TD Cowen downgraded its stock following the release of the company’s Q3 earnings report. With the airline experiencing a plunge in profits, Southwest’s stock hit a 9-1/2 year low. Let’s delve into what contributed to this decline and how it’s affecting investor sentiment.

The Impact on Earnings and Stock Performance

Southwest Airlines witnessed a decline in net income during the third quarter, down by 24.1% compared to the previous year. Soaring fuel and labor costs were cited as the primary reasons behind this decrease. As a result, Southwest Airlines experienced a decrease in its stock value, with shares falling by 4.3% to $22.39, reaching their lowest point since March 2014.

Analyst Insights on Southwest Airlines

TD Cowen analyst Helane Becker provided an analysis of Southwest Airlines’ Q3 earnings report. While the company’s adjusted profit for the quarter was better than predicted by TD Cowen, it fell below consensus estimates. Becker highlighted that revenue of $6.25 billion also fell below expectations. To address these challenges and improve results, Southwest Airlines management plans to reduce capacity growth. However, investors are concerned about various factors, including balance sheet destruction, overcapacity, high costs, and lower yields.

Becker pointed out that Southwest Airlines had previously demonstrated strong revenue growth and double-digit operating margins before the pandemic. During downturns, Southwest strategically utilized market opportunities to grow and increase its market share. However, this time, investors perceive a broken model due to the absence of a premium product, excessive capacity in business-focused markets, limited international exposure, and anticipated further increases in costs.

Considering these concerns, TD Cowen downgraded Southwest Airlines’ stock rating from Outperform to Market Perform. Additionally, Becker revised the earnings per share estimate for Southwest Airlines in 2024 from $1.49 to 54 cents. This revised estimate is significantly lower than the consensus EPS forecast of $2.18. TD Cowen anticipates a general downward adjustment of consensus estimates for Southwest Airlines in the future.

Southwest Airlines’ Response and Future Plans

Southwest Airlines CEO, Robert Jordan, acknowledged the challenges faced by the company during the earnings conference call. He emphasized that the airline is thoroughly evaluating the current macroeconomic environment and post-pandemic travel trends. The objective is to devise a comprehensive plan that best positions Southwest Airlines for future success. Jordan mentioned that Southwest Airlines expects a nominal decline in seats during the latter half of 2024 compared to the same period in 2023. Consequently, the company’s network plan will focus on accommodating current capacity, developing maturing markets, and designing schedules that align with current travel patterns.

Market Sentiment and Analyst Ratings

Various sources, including Wall Street analysts, SA Authors, and Seeking Alpha’s Quant system, have assigned a Hold rating to Southwest Airlines stock (LUV). This indicates a level of caution and uncertainty surrounding the airline’s performance in the immediate future. Investors are likely evaluating the company’s ability to overcome the challenges that have impacted its stock and profitability.

Conclusion

The recent downgrade of Southwest Airlines’ stock by TD Cowen, coupled with a decline in Q3 earnings, has raised concerns among investors. The challenges related to costs, capacity, and market perception have led to a reevaluation of Southwest Airlines’ business model. As the company looks ahead, it aims to navigate the current market conditions and adapt its strategies accordingly. The decisions made by Southwest Airlines’ management in response to these challenges will ultimately shape the future performance and direction of the airline.