Shares of Southwest (LUV) are under pressure on Wednesday after the company lowered its revenue outlook for the first quarter and following Goldman Sachs' downgrade of the stock to Sell. Analyst Catherine O'Brien expects the stock to underperform and Southwest's 2019 pretax margin to decline due to the dilutive impact of the company's new Hawaii flying and unit cost ex-fuel pressures.
GUIDANCE CUT: In a regulatory filing, Southwest Airlines provided guidance regarding its first quarter 2019 operating revenue trends. The company previously communicated an estimated negative revenue impact in the $10M-$15M range for January 1st through 23rd related to the government shutdown. Since then, the company has continued to experience softness in passenger demand and bookings as a result of the government shutdown, Southwest stated. As a result, the company now estimates the negative revenue impact to first quarter 2019 to be approximately $60M. Aside from this impact, the company has continued to experience strength in year-over-year close-in yields, thus far in first quarter 2019. Based on current bookings and yield trends, the company now expects its first quarter 2019 operating revenue per available seat mile, or RASM, to increase in the 3%-4% range, year-over-year. This compares with the company's previous first quarter 2019 RASM guidance of a year-over-year increase in the 4%-5% range.
SELL SOUTHWEST: In a research note to investors, Goldman Sachs' O'Brien downgraded Southwest Airlines to Sell from Neutral and lowered her price target on the shares to $54 from $66, as she expects the stock to underperform compared to other stocks she covers. The analyst sees Southwest's fiscal 2019 pretax margin declining 60 basis points due to the dilutive impact of its new Hawaii flying and unit cost ex-fuel pressures in a year when she is forecasting most of her coverage universe to see margin expansion. Southwest's Hawaii flights should ultimately be profitable and earnings accretive, but in the near-term the service may put pressure on unit revenue, she contended. While O'Brien noted that she continues to expect Southwest to produce margins in the top half of her coverage universe and that these short- to medium-term issues do not change her view that Southwest is one of the highest quality companies she covers, the analyst argued that its relative margin underperformance combined with multiple compression will translate to share price underperformance. Further, O'Brien added that she prefers shares of Alaska Air (ALK) at this time as she expects Alaska to see greater than industry average margin expansion in 2019.
PRICE ACTION: In morning trading, shares of Southwest have dropped over 5% to $54.55. Meanwhile, American Airlines (AAL) and Alaska Air have slipped more than 1% to $34.97 and $63.68, respectively. Also lower, United Continental (UAL) and Delta Air Lines (DAL) have slid about 2% to $87.69 and $50.88, respectively. Shares of JetBlue (JLU) have also dropped 1.5% to $17.66.
