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Key Takeaways
- Expansion of SkyWest's fleet and servicing underserved markets positions the company for revenue growth and regional market share increase.
- Strategic financial actions and improved operational efficiencies hint at enhanced profitability through disciplined debt management and share buybacks.
- Increasing maintenance costs, MRO network challenges, fluctuating demand, reliance on new aircraft deliveries, and a slowdown in share repurchases could strain operating margins and impact growth.
Catalysts
About SkyWest- Through its subsidiaries, engages in the operation of a regional airline in the United States.
- The expansion of the fleet with 8 new United-financed E175s and the anticipation of additional aircraft by the end of the year and into 2025, enhancing regional market share and positioning the company for increased revenue through expanded capacity and service options.
- The significant demand for regional airline services, especially in underserved and small markets, presents an opportunity for SkyWest to grow its operational footprint and increase revenue by catering to this demand more effectively as the market continues to recover post-COVID.
- The improvement in pilot availability, with over 5,000 pilots expected by year-end and better captain staffing, will enable SkyWest to increase its block hour production by 9% to 11% in the latter half of the year, directly impacting revenue through increased flight operations.
- The recent performance in generating positive free cash flow and strategic actions such as repaying over $115 million in debt and share buybacks illustrates financial discipline and operational efficiency, potentially improving net margins through reduced interest expenses and enhanced EPS.
- The anticipated full utilization of SkyWest's ERJ and CRJ fleets by mid-2025, alongside a modest increase in maintenance expense due to higher utilization and bringing aircraft out of storage, suggests that revenue growth might outweigh the increased costs, leading to improved profitability as the fleet returns to more normal operational levels.
Assumptions
How have these above catalysts been quantified?- Analysts are assuming SkyWest's revenue will grow by 9.1% annually over the next 3 years.
- Analysts assume that profit margins will increase from 5.5% today to 9.5% in 3 years time.
- Analysts expect earnings to reach $395.3 million (and earnings per share of $8.66) by about October 2027, up from $176.9 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 13.6x on those 2027 earnings, down from 21.0x today. This future PE is greater than the current PE for the US Airlines industry at 11.1x.
- Analysts expect the number of shares outstanding to grow by 4.39% per year for the next 3 years.
- To value all of this in today's dollars, we will use a discount rate of 7.79%, as per the Simply Wall St company report.
Risks
What could happen that would invalidate this narrative?- Increased maintenance expenses anticipated as the fleet returns to higher utilization and aircraft are brought out of storage could strain operating margins.
- Challenges in the MRO (Maintenance, Repair, and Overhaul) network, including labor and parts issues, may lead to operational inefficiencies and increased costs, potentially impacting net margins.
- The demand for regional lift varies and is subject to the networks and capacity strategies of major partners. Any reduction in demand or changes in partner strategies could negatively affect revenue.
- Relying on the continued receipt and integration of new aircraft (such as the E175s) for growth is risky due to potential delays or changes in delivery schedules, affecting revenue projections and growth.
- Slowdown in share repurchase pace suggests a shift in capital allocation which could impact earnings per share and investor sentiment if perceived negatively.
Valuation
How have all the factors above been brought together to estimate a fair value?- The analysts have a consensus price target of $95.25 for SkyWest 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 $101.0, and the most bearish reporting a price target of just $85.0.
- In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $4.1 billion, earnings will come to $395.3 million, and it would be trading on a PE ratio of 13.6x, assuming you use a discount rate of 7.8%.
- Given the current share price of $92.6, the analyst's price target of $95.25 is 2.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
- 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.
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Disclaimer
Warren A.I. is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by Warren A.I. are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that Warren A.I.'s analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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