Southwest Airlines: S&P Intraday Gainer

NEW YORK (TheStreet) - Southwest Airlines(LUV) was the best performing stock in the S&P 500 on Tuesday morning.

The S&P 500 was rising about 1.5 points, or 0.11%, to 1,354.

Shares of the Dallas-based airline were up more than 5% to $9.75 in recent trades after Sterne Agee upgraded the stock to buy from neutral and lifted its price target by more than 15% to $15 from $13.

"While LUV continues to digest integration costs, better overall weather has led to better than expected completion factors this quarter and lower unit costs at a majority of airlines in our coverage group," the firm said in its research note. "Combined with an unusually under-hedged position at LUV going into this past quarter, we believe LUV has the ability to surprise investors with a stronger 2Q, 2H12 and 2013 hedged portfolio, and ultimately, upside to EPS estimates."

Southwest is expected to report its second-quarter results on July 19, and the average estimate of analysts polled by Thomson Reuters is currently for a profit of 32 cents a share on revenue of $4.55 billion in the June-ended period.

Sterne Agee anticipates the airline could enjoy a healthy bump from the recent drop in oil prices.

"For 2Q, LUV had very little hedged derivative exposure, and implied $0.06 per share of 2H12 upside based on a $14 drop in average crude prices -- in June, we witnessed a $20+ per barrel drop from mid April levels," the firm said. "As of the end of 1Q, LUV had hedged 40% of 2013 consumption, 15% of 2014 consumption, and only 10% of 2015 consumption. While there might be a 2Q mark-to-market loss on previous hedged positions, we believe investors will look through this and focus on the additions to these hedge positions, to be reported in two weeks."

The stock currently trades at an estimated price-to-earnings ratio for next year of 23.1 times; the average among its peers is 14.16X. For comparison, JetBlue Airways(JBLU) has a lower forward P/E of 14.21X.

Nine of the 19 analysts who cover Southwest Airlines rate it at buy. Eight analysts give the stock a hold rating and two rate it at sell.

As of Monday's close at $9.24, Southwest shares were down 15% in the past year but had appreciated more than 8% since the start of 2012. The stock's 52-week high of $11.07 dates back to July 2011.

--Written by Alexandra Zendrian in New York.