Analysts bail on Southwest Airlines after its disappointing quarterly earnings

Published Fri, Jul 28 20237:30 AM EDTUpdated Fri, Jul 28 202311:39 AM EDT

Wall Street is beginning to step to the sidelines for Southwest Airlines . The company's second-quarter earnings report disappointed investors. The company said its ongoing struggles with lower unit revenue on higher costs are likely to continue into the current quarter. Deutsche Bank downgraded shares to hold from buy on an earnings forecast cut and limited upside. "After comparing June quarter operating and pretax margins to the four airlines that have already reported (i.e., Alaska, American, Delta, and United), Southwest did not look so fine ranking last," Deutsche analyst Michael Linenberg wrote in a Friday note. "Our sense is that Southwest is 'punching below its weight class' with respect to revenue generation, possibly due to the fact that it has yet to fully achieve network optimization. We also believe the company is falling behind its peers from a revenue diversification perspective," Linenberg added. The analyst lowered his price target to $38 from $52, still implying 15% upside from Thursday's close. Raymond James also downgraded Southwest shares to outperform from strong buy, calling it a "Texas-size heartache." The firm reduced its price target to $40 from $47, implying a 21.1% rally. Analyst Savanthi Syth said that while the company has taken the right steps to adjust its schedule to reflect post-pandemic shifts in travel, the recovery to 2019-level profitability will not be seen until 2024 to 2025. "To be clear, we do not believe the Southwest model is broken, and we believe valuation should reflect its net cash position resulting in a balance sheet that is head and shoulders above most of the industry," Syth said in a Friday note. Bank of America decreased its price target on shares to $35 from $45, which implies just 6% upside from where shares ended Thursday. Analyst Andrew Didora said the company's cost increases were "hard to defend" in his downgrade to neutral from buy. "2023 was the year LUV needed to focus on hitting its capacity and cost goals, particularly in light of the operational issues the airline had at the end of 2022. While capacity continues to be added and tracking in line with plan, unit costs keep moving higher due to labor costs and likely continued investments in the operation," Didora said. Southwest shares shed 0.6% Friday before the bell, following an almost 9% tumble during the previous trading session. The stock is down 1.9% year to date. — CNBC's Michael Bloom contributed to this report.