New Union Agreements And Amazon Cargo Expansion Will Improve Operational Efficiency And Profitability

Key Takeaways

• New union agreements may enhance workforce stability, boosting operational efficiency and improving net margins.
  
• Cargo expansion through Amazon agreement is expected to significantly impact overall revenue and profitability.
  
• Diversifying into cargo services and facing increased competition and expenses could pressure revenue stability, unit revenue, and overall profitability.

Catalysts

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

• Sun Country Airlines' new agreements with unions for flight attendants and dispatchers may improve workforce stability, potentially enhancing operational efficiency and increasing net margins.
  
• The expansion in the cargo division with the addition of new aircraft from its Amazon agreement is expected to double cargo revenue, which would significantly contribute to the company’s overall revenue and profitability.
  
• Scheduled service capacity rationalization and an improvement in TRASM (Total Revenue per Available Seat Mile) are anticipated to support future revenue growth, particularly in well-performing core markets.
  
• Operational metrics such as high completion rates and low mishandled bag rates enhance customer satisfaction, which can improve brand reputation and support stable or improved revenue streams.
  
• Sun Country aims for high levels of free cash flow and plans to maintain strong operational performance, positioning the company for continued financial health and strengthening its balance sheet, which could positively impact earnings.

Sun Country Airlines Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Sun Country Airlines Holdings's revenue will grow by 8.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.9% today to 11.8% in 3 years time.
• Analysts expect earnings to reach $160.7 million (and earnings per share of $2.75) by about May 2028, up from $52.9 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 7.1x on those 2028 earnings, down from 9.8x today. This future PE is lower than the current PE for the US Airlines industry at 8.5x.
• Analysts expect the number of shares outstanding to grow by 1.04% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.71%, as per the Simply Wall St company report.

Sun Country Airlines Holdings Future Earnings Per Share Growth

Risks

• The company's expansion into cargo services, while providing diversification, also introduces risk if demand or profitability in cargo declines, impacting revenue stability and growth.
  
• The scheduled service capacity reduction, while strategic, could lead to lower revenue generation, particularly if competitors seize market share opportunities during this pullback.
  
• Increased operating expenses from new union agreements and updated pilot pay could pressure net margins, especially if revenue growth does not keep pace with rising costs.
  
• Reduced scheduled service ASMs and potential underperformance in Caribbean markets could negatively impact unit revenue and overall profitability.
  
• Potential increased competition due to other airlines entering or increasing presence in Sun Country’s markets might lead to pricing pressures, affecting earnings and market share.

Valuation

• The analysts have a consensus price target of $16.556 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 $23.0, 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 2028, revenues will be $1.4 billion, earnings will come to $160.7 million, and it would be trading on a PE ratio of 7.1x, assuming you use a discount rate of 8.7%.
• Given the current share price of $9.82, the analyst price target of $16.56 is 40.7% 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.