And while shares of SkyWest have sold off heavily so far this year, the stock still doesn’t look like a screaming value at these levels.
SkyWest operates the largest regional airline in the United States through SkyWest Airlines and ExpressJet Airlines. The company has fixed-fee flying arrangements with United Airlines, Delta Air Lines, American Airlines and US Airways to operate as United Express, Delta Connection, American Eagle and US Airways Express. The company also operates flights for Alaska Airlines under a contractual agreement.
Under these agreements, the major airlines generally pay SkyWest a fixed fee for each departure, with additional incentives based on completion of flights, on-time performance and baggage handling performance.
SkyWest serves markets throughout North America with approximately 4,000 daily departures and a fleet of approximately 757 regional aircraft. It is headquartered in St. George, Utah.
Second Quarter Results
SkyWest delivered disappointing second quarter results on August 6. The company reported a loss of 29 cents per share for the quarter, missing the Zacks Consensus Estimate by 10 cents. This was down from a gain of 39 cents in the same quarter last year.
Operating revenues fell 3% to $816.6 million, well below the consensus of $849.0 million. The number of passengers carried also fell 3%. The company missed contract performance incentives and had unfavorable flying contract settlements that also contributed to the revenue decline.
Revenue fell 9% in the company’s ExpressJet segment, which more than offset 3% revenue growth in its SkyWest division.
Excluding special items, total operating expenses rose 1%, driven by increases in fuel and compensation. The operating profit margin plunged from 6.0% to 1.6% of revenues. And total operating profit of $13.2 million was insufficient to cover the $16.1 million in interest expenses.
Once again, the ExpressJet segment was a drag on overall results. The segment’s loss totaled more than $34 million for the quarter. The SkyWest segment generated a profit of $31.3 million, but this was down 22% year-over-year.
Overall, the company generated just $32.5 million in operating cash flow through the first half of 2014, down from $129.3 million in the same period last year.
Following the Q2 miss, analysts revised their earnings estimates significantly lower for SkyWest, sending the stock to a Zacks Rank #5 (Strong Sell).
The Zacks Consensus Estimate for 2014 is now calling for a loss of 35 cents. That’s down from a projected gain of 43 cents before the Q2 report. The 2015 consensus is currently $0.53, down from $0.61 over the same period.
You can see the sharp drop in estimates in the company’s “Price & Consensus” chart:
Shares of SkyWest have sold off heavily so far in 2014, but the valuation picture still doesn’t look very attractive. The stock trades around 32x 12-month forward earnings and more than 16x the current 2015 consensus.
Its enterprise value to trailing-twelve month operating cash flow ratio of 6.4 is in-line with market.
The Bottom Line
Given the weak financial results and falling estimates, investors should consider avoiding SkyWest at least until its earnings momentum improves.