Citi analyst Stephen Trent downgraded Southwest Airlines to sell from neutral, citing concerns over valuation and earnings quality. Trent lowered his price target to $29.50, suggesting a potential 10.1% decline from Wednesday's close. He pointed to a deterioration in Southwest's earnings quality and free cash flow conversion compared to pre-pandemic levels and other airlines, despite a rise in price-to-earnings premiums. Trent expects Southwest's valuation to normalize as network carriers benefit from premium travel, limiting Southwest's expansion in that segment.
Citi turned negative on Southwest shares amid concerns over valuation and earnings quality. Analyst Stephen Trent downgraded the airline to sell from neutral and cut his price target by $2 to $29.50. Trent's new price target suggests shares can fall 10.1% from Wednesday's close. Trent said Southwest's earnings quality and free cash flow conversion have deteriorated compared with before the pandemic, despite other carriers seeing improvements in this areas.
With the downgrade, Trent left the majority on Wall Street which has a hold-equivalent rating on the stock, according to LSEG. Trent noted that Southwest's long-term guide suggests weaker conversion of earnings before interest and taxes to free cash flow compared with pre-pandemic levels. Part of this trouble stems from sale-leaseback activity, the analyst noted.
Southwest Airlines Citi Downgrade Valuation Earnings
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