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Southwest Airlines could be positioned for more gains on the heels of the past year’s deal with activist investor Elliott Investment Management, Deutsche Bank says. Analyst Michael Linenberg upgraded the airline stock to buy from hold and increased his price target by 43% to $40 from $28. That implies nearly 22% upside from Wednesday’s close of $32.89. The upgrade comes after Elliott and Southwest Airlines struck a deal in October to keep chief executive Bob Jordan and add six directors to the airline’s board, staving off a proxy fight. Months before, Elliott had amassed an 11% stake in the company. “Nearly one year ago, Elliott Management took an 11% economic interest in LUV (now with a stock acquisition cap of 19.9%) and became one of the largest investors in the company. Elliott worked with Southwest to change its board of directors and the new board has nearly 200 years of combined experience within the aviation industry,” Linenberg wrote in a Wednesday note. “Southwest is in the middle of the largest transformation in company history and we are confident that its new board and management team will execute its transformation plan with considerable success.” LUV 1Y mountain LUV, 1-year Southwest has outperformed the broader market lately, soaring almost 21% in the past month and about 29% in the past year. Linenberg believes that Southwest’s new board has brought about a “new era of change at the company” and will spur bigger shareholder returns in the future. The analyst said that the airline should see “meaningful” revenue and earnings growth over the next two years as a result of current strategic initiatives. He also thinks the airline’s return on invested capital (ROIC) will offer significant improvement in that timeframe. “Historically, we have seen outsized share price performance by airlines that meaningfully improved their ROIC and ROIC – WACC spreads,” he said, referrring to the weighted average cost of capital. “We think that Southwest is best positioned from this perspective.” Linenberg is in the minority on Wall Street, with 12 of 23 analysts covering the airline rating it a hold, according to LSEG. Only five rate it it the equivalent of a buy. The stock was almost 2% higher premarket Thursday following the Deutsche Bank upgrade.
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