DALLAS (AP) — Shares of Southwest Airlines climbed Tuesday after Wall Street analysts raised their profit forecasts and one upgraded the stock, suggesting that the carrier will outperform its peers.
THE SPARK: Sterne Agee upgraded Southwest to "Buy" from "Neutral." Analyst Jeffrey A. Kauffman said Southwest, like other airlines, is benefiting from cheaper jet but has yet to see the same bounce in its stock compared with others in the sector.
Kauffman raised his forecast of Southwest earnings, and on that point he was joined by Maxim Group LLC analyst Ray Neidl.
THE BIG PICTURE: Airlines raised base fares about a dozen times in 2011 and early 2012 to cope with rising jet fuel prices. Since the beginning of April, however, the spot price for jet fuel has tumbled 15 percent, according to government figures, following crude oil prices down.
That could be a boon for airlines as long as they don't give their windfall back to consumers in lower fares. So far, analysts suggest, demand for travel and the limited supply of airline seats has allowed the carriers to keep prices about as-is. That's helped boost airline stocks.
Through Monday, Southwest shares have risen 8 percent in 2012. That is compared with 35 percent at Delta, 27 percent at United, and a whopping 166 percent gain at US Airways, which has risen on speculation that it could acquire American Airlines parent AMR Corp. out of bankruptcy. The Arca index of airline stocks has risen 21 percent for the year.
THE ANALYSIS: Kauffman of Sterne Agee said that Southwest's shares have lagged because of the perception that competitors will benefit more from lower fuel prices.
In the past, Southwest often was more aggressive than rivals in hedging against fuel costs. That tended to hurt Southwest when fuel prices fell. But Kauffman said Southwest lately has been "unusually under-hedged" on fuel. He said shares in the Dallas carrier are poised to outperform other airline names.
Kauffman also increased his forecast of 2012 earnings to 97 cents per shares from 83 cents per share and raised his outlook for 2013 too.
Maxim Group analyst Ray Neidl raised his forecast of 2012 earnings to 81 cents per share from 68 cents per share, citing lower fuel costs. He kept a "Hold" rating on the stock.
Neidl said Southwest remained concerned about consumer resistance to higher fares, "and we believe that this could make the airline hesitant to put through further increases, which would be a negative for the industry."
SHARE ACTION: In midday trading, shares of Southwest Airlines Co. rose 4.7 percent, or 43 cents, to $9.67. Other airline stocks were mixed.
For Southwest shares, the 52-week high of $11.07 was hit a year ago, and they sunk to a low of $7.15 in October.