Bernstein Research analyst David Vernon upgraded Southwest Airlines Company (NYSE:LUV) from Underperform to Market Perform and raised the price target from $26 to $32 on Tuesday, citing a change in sentiment on domestic pricing.

In a new note to clients, Vernon highlighted resiliency in travel demand and positive commentary from airline management teams during the recent earnings cycle which has led Bernstein to anticipate stronger development in the domestic market than it had previously forecasted.

The Bernstein analyst pointed to a more moderate capacity forecast due to slowing deliveries from Boeing, equipment availability issues at Spirit and Frontier Airlines' shift out of competitive markets. When combined with strong travel demand, Bernstein believes a positive revision to revenue forecasts is appropriate.

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The Bernstein analyst noted, however, that it will be difficult for Southwest to increase its returns on capital to pre-Covid levels. Vernon also cautioned that Southwest's elevated valuation leaves it more vulnerable to shifts in the domestic travel pricing environment.

Although Bernstein upgraded the stock to Market Perform, the firm continues to see more downside risk in the airline stock than upside potential. Southwest Airlines shares are currently trading above Bernstein's 12-month price target of $32.

LUV Stock Forecast in 2030

While past performance is not a direct indicator of future results, investors should have an idea of a stock's historical growth rate and systemic risk. Southwest Airlines has grown -8.16% over the past five years compared to 12.52% growth in the S&P 500. Southwest Airlines also has a beta of 1.49, suggesting high volatility when compared to the S&P 500.

Southwest Airlines operates in the Industrials sector and has a forward P/E ratio of 17.89, which is below the S&P 500 average of 22.44. A lower ratio suggests that investors are paying a low price today for expected future returns.

Growth stocks can generate high returns over the long term but can also be more volatile and considered riskier. Conversely, a lower ratio generally indicates more stable revenues and less expected volatility.

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LUV Price Action: According to Benzinga Pro, Southwest Airlines shares were up 1.12% at $34.31 at the time of publication.

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