Shares of Southwest Airlines Co. had their best day in more than two years on Monday, when activist investor Elliott Investment Management L.P. said it had a big stake in the airline that wasn’t doing well.
Elliott wrote to Southwest’s board of directors with ideas that he thought could increase the stock’s value by 77% in a year. These ideas included “upgrading” the company’s leadership and reviewing the whole business plan.
When asked for a comment, Southwest did not respond right away.
In morning trading, the stock LUV, 9.10% went up 6.4%. It has gone up 15.7% since May 29, when it hit a six-month low of $25.51. The bull run began with a six-week winning streak.
But the stock was still down 12.6% since the company lowered its sales forecast in the middle of March because of low demand.
Southwest has a market value of $17.67 billion, and Elliott said on Monday that it has invested about $1.9 billion in the airline. This makes Elliott one of the biggest shareholders in Southwest. The announcement backed up a report in The Wall Street Journal about Elliott’s big stake.
Elliott said that Southwest’s stock had lost more than half of its value in the last three years and was now trading below what it was worth when COVID-19 was declared a pandemic in March 2020. As low as $30.86 at the end of March 2020.
Elliott said, “Southwest’s stubborn adherence to a decades-old method has made it harder for it to compete in the modern airline industry.”
Elliott said that the airline has “outdated software, a dated monetization strategy, and antiquated operations processes” because management is “stubbornly unwilling” to modernize. The operational meltdown in December 2022 was a clear example of this.
The stock could go up to $49 a share within a year if Southwest listens to its suggestions. That would be a 77% increase from Friday’s closing price of $27.75 per share.
Elliott Partners’ John Pike and Bobby Xu asked Southwest to replace its board of directors with “new, truly independent” directors from outside Southwest in a letter sent to the board.
To guide the changes in Southwest’s strategy, Elliott also pushed for a “upgrade of leadership,” this time with people from outside the company.
Third, Elliott suggested that Southwest should create a committee to look at all the ways the company could improve its performance. These could include updating its IT systems, making it easier to manage costs, and updating its strategy to focus on giving customers more options.
Elliott bought its share of Southwest sometime in the last two and a half months, since the investor’s 13F form from last month, which listed its stock holdings as of March 31, did not list any Southwest shares.
FactSet data shows that Elliott’s biggest stock investment by market value before the Southwest stake news was Suncor Energy Inc. SU, 1.01% SU, 1.00% at $1.94 billion, which is about 4% of the energy company’s market cap. Next were the $1.93 billion worth of Triple Flag Precious Metals Corp. shares that Elliott owned. These shares were worth about 63.5% of the market value of the precious metals company.
An analyst at Melius Research named Conor Cunningham said it’s “not all that surprising” that an activist investor is interested in Southwest. Elliott might see this as a chance to make the case for a stronger belief that the airline won’t grow until the return on invested capital (ROIC) is higher than the weighted average cost of capital (WACC).
Cunningham told his clients in a note that Southwest would benefit from slower growth and greater efficiency. He also said that the industry as a whole would likely benefit.
He said again that he thought the stock was a “sell” and set a price target of $22, which is 21% below Friday’s closing price.
SWB stock has gone up 2.2% so far this year, while the U.S. Global Jets ETF JETS has gone up 5.2% and the S&P 500 index SPX has gone up 12%.
