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Stock Market News: Southwest Gets Some Love; Amazon Faces Higher Costs

By Dan Caplinger – Sep 23, 2019 at 11:08AM

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Major benchmarks lost some ground Monday morning.

The stock market was modestly lower on Monday morning as investors focused on negative news on the global macroeconomic front. Poor data out of Germany showed that the prospects for European economic growth remain weak, and that could spill over into the global economy quite easily. As of just before 11 a.m. EDT, the Dow Jones Industrial Average (^DJI 3.15%) was down 59 points to 26,876. The S&P 500 (^GSPC 3.06%) dropped 5 points to 2,987, and the Nasdaq Composite (^IXIC 2.82%) was lower by 14 points to 8,103.

As earnings season looms ahead, Wall Street professionals are looking closely at many of the most important companies in the economy. Today, Southwest Airlines (LUV 1.59%) got a nod from analysts for the airline's future prospects, but (AMZN 3.24%) took a modest hit, as investors expect its share price to remain under pressure for the foreseeable future.

Looking to fly higher

Shares of Southwest Airlines were up a fraction of a percentage point Monday morning after the airline got good news from a Wall Street analyst. Bank of America's BofA Merrill Lynch unit upgraded Southwest stock from neutral to buy, singling out the Dallas-based airline as a potential big winner in the near future.

Southwest jet on a taxiway at an airport in a desert landscape.

Image source: Southwest Airlines.

In general, BofA Merrill wasn't entirely bullish on airlines, pointing to the likelihood of higher capacity and falling demand to put pressure on profits across the industry. Indeed, the analyst company downgraded Southwest rivals American Airlines Group and Spirit Airlines, seeing them as being in a less favorable position than Southwest.

The key advantage that Southwest has in BofA Merrill's eyes is an attractive cost structure that includes modest levels of debt and relatively solid relationships with its labor units. That's not the case at American in particular, which the analyst sees as having potential troubles with employees, as well as having a lot of debt on its balance sheet.

Southwest has waited impatiently for its fleet of 737 MAX aircraft to get the go-ahead to fly again, and that might not happen now until 2020. Yet when those planes become available, they could help give Southwest a key boost that could launch another wave of growth for the standout airline.

Amazon shipping takes its toll

E-commerce giant saw its stock drop 1% early Monday, responding to negative comments from analysts at Morgan Stanley. The Wall Street giant cut its price target on Amazon by $100 per share to $2,200, citing cost concerns that could slow its recent profit growth.

Morgan Stanley pointed to the fact that Amazon has recently introduced one-day shipping for members of its Amazon Prime subscription service. According to the financial institution's analysis, the cost of one-day shipping was more than double the average cost per unit that Amazon has paid recently, and fulfillment costs are similarly elevated. Yet customers typically don't order much in their one-day requests, with Morgan Stanley finding that average one-day order values are barely a third of Amazon's overall numbers.

Long-term investors are still optimistic, though. Despite short-term cost pressures, having better shipping terms should lure more Amazon customers to sign up for Prime membership, and like the memberships that warehouse retailers charge, Prime subscriptions are high-margin items that contribute to profits and can make up for some higher costs elsewhere.

A lower price target is always disappointing, but a $2,200-per-share figure would still be almost 25% higher than where the stock is currently. That size of an upward move could be the tip of the iceberg if Amazon sees the benefits of one-day shipping start to offset its costs.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Southwest Airlines. The Motley Fool has a disclosure policy.

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Stocks Mentioned, Inc. Stock Quote, Inc.
$116.66 (3.24%) $3.66
Southwest Airlines Co. Stock Quote
Southwest Airlines Co.
$31.33 (1.59%) $0.49
Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$29,629.31 (3.15%) $903.46
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
$3,695.29 (3.06%) $109.67
NASDAQ Composite Index (Price Return) Stock Quote
NASDAQ Composite Index (Price Return)
$10,873.84 (2.82%) $298.22

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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