ERJ - SkyWest Stock Can Fly Significantly Higher

2023-11-20 10:13:51 ET

Summary

• SkyWest reported solid Q3 2023 financial results, despite a decrease in operating income due to higher pilot pay and staff compensations.
• The growth opportunities for SkyWest include the pass-through nature of fuel costs and capacity agreements with minimum guarantees, which shield the company from price fluctuations and weakening ticket prices.
• SkyWest is repurchasing stock and expects to execute the same number of block hours in 2024, with the shortage of pilots being the limiting factor. There is significant upside potential for the stock based on improved EBITDA estimates and free cash flow projections.

In August, I marked SkyWest ( SKYW ) stock a hold but did point out the strong balance sheet with significant cash to be deployed for debt repayment driving down interest payments and share repurchases to drive value for shareholders. Last month, the company reported Q3 2023 results and provided some useful information for 2024. In this report, I will be analyzing the results and probably more importantly I will be revisiting my price target based on my upgraded stock screener which provides price targets and ratings based on forward earnings, balance sheet and historical ability to outperform the markets.

SkyWest Posts Stellar Q3 2023 Financial Results

The results that SkyWest reported are not extremely impressive if you consider that operating income fell from $75.6 million to $49.3 million. However, you might be able to appreciate the results a bit more when you consider that the decrease in operating income was driven by the higher pilot pay and staff compensations. Costs remained relatively flat year-over-year as increases in salaries were offset by a lower fuel bill and lower aircraft rental costs as the company exercised early lease buyout options. Revenues decreased $23.2 million or 2.3% but given the 10.2% decline in block hours I do think that revenues have held quite well and while the cost absorption is of course not favorable, I think the overall results were quite solid.

What Are The Growth Opportunities For SkyWest?

SkyWest might be a bit more attractive for investors that want exposure to airline stocks due to the pass through nature of fuel costs, and as you might know, fuel costs have significantly risen in recent months but the setup of regional carriers shield them from this price fluctuation. Also, weakening ticket prices do not have a major impact on the results as SkyWest’s operations have minimal exposure to air fares and are held up firmly by capacity agreements with minimum guarantees.

Overall, the limiting factor remains the shortage of pilots, but SkyWest has been seeing some stabilization in that which allows the company to plan ahead along with an agreement with United Airlines ( UAL ) to fly 19 more E175s over the next three years. To that we can add that given the pilot shortage, the bigger regional jets are higher in demand as it allows for bigger capacity lift per flight crew.

For investors, a big plus is that SkyWest is repurchasing stock. Year-to-date, the company has repurchased 19% of its outstanding stock returning significant value to shareholders which layers nicely on the stock price rationalization. For 2024, SkyWest expects to execute the same number of block hours with pilot shortages being the limiting factor. Any easing of the shortage will provide a positive upside to block hour execution. SkyWest also does not require major CapEx for executing more block hours as its current fleet footprint can accommodate 35% growth in CRJ block hours while the Embraer ( ERJ ) jets can accommodate 14% growth.

So, we do not know how much upside 2024 and the years beyond hold for SkyWest but it is a big positive that it is already sized to execute significantly more block hours and with aircraft prices being high, having an underutilized fleet that can grow block hours in the years to come might be favorable compared to executing a fleet matching the current pilot lift capacity and having to pay premiums on jets in future years to execute growth.

Can SkyWest Stock Fly Higher?

I have updated the balance sheet data and forward projections for SkyWest and based on 4.8% improvement in EBITDA estimates through 2025 and double digit free cash flow improvement compared to previous free cash flow estimates, there is significant upside to stock prices using the evoX Stock Screener. The stock screener has also been improved to capture more changing factors allowing for more accurate stock price target calculations, which likely has also contributed to the change in the stock price targets.

Currently SkyWest stock is fairly valued and seems to be trading in line with industry peers. If that industry median is set to hold going forward, then there should be significant upside for SkyWest as it would indicate a $81.30 price target with 75% upside. The rating has also flipped from Hold to Buy. The main reason for this is that I am no longer providing a rating based on gut feeling when observing the annual price targets but a scoring calculation that objectively establishes a scoring to which a rating is coupled automatically.

Conclusion: SkyWest Stock Is A Buy

SkyWest continues to perform sub-optimally, but even in that setting the company is able to generate profits, pay down debt and repurchase stock which I think is admirable. While much of the forward projections are dependent on being able to increase block hours, I think the 75% upside is too juicy to pass on as even on a multi-year delayed timeline the annualized upside would still show growth rates that are in excess of what we normally see on the stock market. The only risk, and it is a big one, is that the block hours do not improve as envisioned while currently it seems the 2024 projections are lined up for at least some improvement.

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