(This story is for CNBC Pro subscribers only.) As demand for travel within the U.S. slowly returns, UBS says Southwest is the best positioned airline, with more than 40% upside to its stock. The Wall Street firm upgraded shares of Southwest to buy from neutral and hiked its 12-month price target to $41 per share from $37, helping to send shares of the airline up more than 11.5% on Tuesday. UBS' target implies 42% upside from current levels. "We see a clearer path for domestic travel recovery … and have started to see enough evidence of LUV's cash burn reduction that some of the tail risk is removed," UBS analyst Myles Walton told clients. Shares of Southwest — alongside other major U.S. airlines — have cratered nearly 50% this year due to the coronavirus pandemic. The deadly virus caused demand for flying to evaporate as millions of Americans stayed home and avoided public spaces due to government mandated shutdowns. However, investors are hopeful that a partial reopening of the economy will allow flying trends to start to return to normal. UBS said weekly domestic air traffic was down 83%, compared with down 94% three weeks ago. Last week, Southwest said new bookings started to outpace cancellations . Walton also said Southwest's balance sheet restoration and fundamental valuation is the clearest among the major airlines. Southwest's balance sheet has low leverage and ample liquidity to manage operations in a depressed demand environment, the firm said. "Unlike many other airlines, the balance sheet position of LUV is remarkably clean (near-net cash balance sheet), which provides protection from any step backward in demand under another wave of COVID-19," said Walton. "We believe that there is a risk that by getting specific federal assistance there will be a heightened regulatory risk on US airline business models into 2021 and beyond; however, assuming regulations are evenly applied, LUV could be a net beneficiary on any "stress testing" of financials. UBS said its price target is based on a seven times earnings multiple and a 12 times price-to-earnings multiple, "both in-line to slightly ahead of historical multiples." —with reporting from CNBC's Michael Bloom.
