(LUV) Southwest Airlines – Bear of the Day

We are downgrading our recommendation on Southwest Airlines (LUV) to Underperform as the company is not expected to report profits in the first quarter this year. The company reported lower year-over-year earnings in the fourth quarter but outpaced the Zacks Consensus Estimate.

Although Southwest is poised to benefit from fleet rightsizing, its Evolve retrofit program, steady capacity growth, All-New Rapid Rewards, AirTran merger synergies and several ancillary revenues, fuel prices continue to drag down the profits. The entire airline industry is currently struggling with higher fuel prices and a slow-moving U.S. economy.

Additionally, high maintenance costs associated with fleet modernization, new advertising rules, risks pertaining to the AirTran integration, heavy investments and reliance on a single fleet keep us cautious on the stock. Hence, we rate the stock Underperform with a target price of $7.50, based on 11x our earnings estimate for 2012.

SOUTHWEST AIR (LUV): Free Stock Analysis Report

View original at: Zacks Investment Research – All Commentary Articles

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