This action could be the biggest deal on the market
Airlines shares have surged since the fall, with investors confident that the rapid development and distribution of coronavirus vaccines would tame the COVID-19 pandemic. In fact, many airlines are now showing a higher market cap than at the start of 2020 – even though their debt load increased significantly during the pandemic and they continue to generate big losses.
On the other hand, SkyWest (NASDAQ: SKYW) almost broke even in 2020 and has already returned to profitability. In addition, its indebtedness decreased last year. Nonetheless, the airline’s shares are still trading around 24% below their value at the start of 2020. That makes SkyWest stock a good deal.
A more secure economic model
As a regional airline, SkyWest derives most of its revenue from fixed-fare agreements with major carriers such as United Airlines. Under these agreements, the main airline covers fuel costs and pays a fixed reimbursement for each flight operated. This shields SkyWest from the two main sources of volatility in the airline industry: fuel prices and the balance between supply and demand.
It operates certain aircraft on a pro rata basis, where it receives a portion of the revenue generated by passengers on those flights – and is therefore exposed to more risk. However, as of March 31, 401 of its 468 aircraft in regular service were flying on fixed price contracts.
The pandemic further hurt the airline as its larger partners did not need as many regional flights as they did before. Yet SkyWest’s business model insulated it from the worst of the recession. As a result, the company posted a modest pre-tax loss of just $ 7 million last year.
Buisness is back
Demand for domestic air travel has seen a significant (but certainly not complete) recovery in 2021. As a result, SkyWest partners are stepping up their regional schedules. Indeed, regional flights – especially on Embraer Jets E175 – is the most economical way for major airlines to rebuild their route networks. The E175 can fly farther than most regional jets and offers equipment comparable to that of mainline aircraft. More importantly, regional airline pilots are typically paid less than half of what their mainline counterparts.
Management estimates that flight volumes will rebound to 2019 levels by the fourth quarter. As many airlines report plentiful demand for summer leisure travel, SkyWest may even return to its 2019 flight volumes in the third quarter.
The airline reported strong first-quarter earnings of $ 0.71 per share, despite a 23% year-over-year drop in block hours. (This included a benefit from the Payroll Support Grants.) With theft poised to increase rapidly over the next few quarters, SkyWest’s revenues and profitability are positioned to quickly recover from the pandemic.
Strong growth prospects
Several US regional airlines closed their doors last year due to the impact of the pandemic and the changing fleet needs of their main partners. As the largest U.S. regional airline, SkyWest has a great opportunity to gain market share as its partners rebuild their regional jet operations (and grow, in some cases).
Earlier this month, Alaska Airlines chose SkyWest to operate eight additional E175s starting next year. SkyWest also has contracts to add 16 CRJ700s and 20 E175s for American Airlines over the next year. Above all, these agreements will further diversify its revenues away from major partners United Airlines and Delta Airlines.
By the end of 2022, SkyWest will operate at least 221 E175s – up more than 40% from the 156 it owned at the end of 2019. The growth of this type of high-margin fleet will likely propel revenue and the company’s profits beyond their 2019 Levels by 2023.
A good deal for all to see
SkyWest shares recently traded for about 8 times the company’s adjusted earnings per share in 2019, or $ 6.25. This is an incredibly low valuation considering its growth prospects and relatively low-risk business model compared to other airlines.
Additionally, the airline ended the last quarter with net debt of $ 2.27 billion, down about $ 200 million from the end of 2019. That’s a very manageable amount compared to its earnings before the pandemic before interest, taxes, depreciation and amortization (EBITDA) of more than $ 850 million. Between its growth opportunities, low valuation and strong balance sheet, SkyWest stock appears to be one of the biggest bargains on the stock market today.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.