Southwest Airlines stock will be closely watched on June 10, as reports of Elliott Management building a $2 billion position in the airline have emerged. Elliott Management is known for pushing for management changes in companies it invests in. This comes as Southwest has underperformed its peers this year, with its stock down 5% while Delta Air and United Airlines have seen their stock rise over 25%.
The issues stemming from Boeing’s production of 737 MAX aircraft have added to Southwest’s challenges. The airline now expects only 20 aircraft deliveries this year, a significant decrease from the 79 it originally anticipated. Additionally, Southwest recently made the decision to shut down operations in four airports, further impacting its network capacity expansion efforts.
The stock performance of LUV has been under pressure recently and over a longer-term horizon. LUV stock has declined 35% from early 2021 levels to around $30 currently, while the S&P 500 has seen a 40% increase over the same period. The stock has underperformed the broader market in each of the last three years, with returns of -8% in 2021, -21% in 2022, and -14% in 2023, compared to positive returns for the S&P 500.
Consistently outperforming the S&P 500 has been challenging for individual stocks in recent years. The Trefis High Quality Portfolio, comprised of 30 stocks, has outperformed the S&P 500 each year over the same period, providing better returns with less risk. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, Southwest Airlines may face difficulties in the coming months.
From a valuation perspective, LUV stock appears to have limited room for growth, with Southwest Airlines’ estimated valuation at $31 per share compared to its current market price of around $28. This forecast is based on 0.7x sales for Southwest, in line with the stock’s average over the last two years. However, if Elliott Management is successful in influencing changes at Southwest to drive long-term growth, there is potential for LUV stock to reach higher levels in the future.
