Southwest Airlines's new air travel to Hawaii may prove profitable in the long run, but the service should pressure margins in the near term, according to Goldman Sachs.
Goldman analyst Catherine O'Brien downgraded the stock to a sell rating from a neutral rating and lowered her fiscal 2019 earnings per share estimate for Southwest to $4.45 from $4.70. The brokerage also cut its 12-month price target to $54 from $66 due to the reduced profit forecast; the stock closed at $57.67 on Tuesday.
Though the analyst remains positive on the airline in the long term, those investors looking for a savvy stock investment in the next year may be better served with other names, O'Brien told clients.
"We expect its relative margin underperformance combined with multiple compression will translate to share price underperformance," O'Brien wrote. "With the delay in Southwest's ability to announce its Hawaii flights and begin selling tickets, we think the shortened selling window for its initial flights will create the need for the company to discount fares more heavily than we initially expected."
Southwest completed its first trip to Hawaii earlier this month as federal safety inspectors oversaw the company's maiden voyage to the islands. The low-cost airline first announced plans to offer service to Hawaii in 2017 and needs regulators to attest to its ability to operate the flights safely.
Southwest shares fell 3.4 percent in premarket trading Wednesday following the Goldman Sachs downgrade.
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