Diversified Services Powering Industry-Leading Profitability And Dynamic Growth

Key Takeaways

• Diversification and flexible operational model provide stability and adaptability, ensuring consistent profitability across economic cycles.
  
• Strategic fleet expansion and capacity adjustments aim to enhance free cash flow and optimize revenue, improving financial health and shareholder value.
  
• Diverse challenges including overcapacity, operational interruptions, seasonal demand variability, strategic shifts towards cargo, and dependence on key contracts threaten Sun Country’s financial stability.

Catalysts

An air carrier company, operates scheduled passenger, air cargo, charter air transportation, and related services in the United States, Latin America, and internationally.

• The company's diversified business model, incorporating charter and cargo segments alongside its passenger service, provides a stable revenue base and flexibility in capacity allocation, expected to support reliable industry-leading profitability. This diversification is likely to impact revenue stability and growth positively.
  
• Scheduled service flexibility and low fixed cost model enable rapid response to market changes and demand fluctuations, enhancing the ability to sustain high net margins through varied economic cycles.
  
• Contractual growth in the cargo sector, along with rate improvements through the end of 2025, alongside higher margin charter operations adjusted for new cost environments, indicate a strong forward-looking revenue and profitability outlook, impacting both revenue growth and net margins positively.
  
• The planned fleet expansion to 71 aircraft without the need for additional CapEx, due to growth coming from leased-out fleet and committed cargo deliveries, points towards high free cash flow yields in the near to midterm, potentially boosting earnings and shareholder value.
  
• The management's strategic capacity adjustments in response to overcapacity and seasonal demand variations, notably reducing off-peak flying, and reallocating resources to higher margin charter and cargo segments, are expected to optimize revenue per available seat mile (RASM) and control costs effectively, positively impacting net margins and overall financial health.

Assumptions

• Analysts are assuming Sun Country Airlines Holdings's revenue will grow by 6.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.7% today to 13.2% in 3 years time.
• Analysts expect earnings to reach $170.0 million (and earnings per share of $2.5) by about September 2027, up from $50.4 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 6.0x on those 2027 earnings, down from 11.9x today. This future PE is lower than the current PE for the US Airlines industry at 11.9x.
• Analysts expect the number of shares outstanding to decline by 5.72% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.4%, as per the Simply Wall St company report.

Risks

• Overcapacity and resulting fare pressure in the domestic market, particularly affecting low-cost carriers, could undermine Sun Country’s revenue from its passenger segment.
  
• Operational challenges such as extended aircraft out-of-service events and IT outages could interrupt services and erode customer trust, negatively impacting future revenue.
  
• Reliance on seasonal and variable demand for leisure travel introduces volatility to earnings, as decreases in demand during off-peak seasons could lead to reduced revenue and margins.
  
• The planned aggressive shift in capacity from scheduled service to cargo and charter segments, while potentially increasing profitability, carries execution risk and may lead to fluctuating unit costs and uncertainties in total operating expenses.
  
• While the expansion into cargo with minimal CapEx and high free cash flow yield is viewed positively, dependence on a few key contracts (e.g., with Amazon) introduces risk if there are disruptions or changes in these relationships, affecting expected revenue and growth in the cargo segment.

Valuation

• The analysts have a consensus price target of $18.17 for Sun Country Airlines Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $20.0, and the most bearish reporting a price target of just $11.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.3 billion, earnings will come to $170.0 million, and it would be trading on a PE ratio of 6.0x, assuming you use a discount rate of 8.4%.
• Given the current share price of $11.31, the analyst's price target of $18.17 is 37.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.