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SkyWest (SKYW) Flying High on Fleet Transition Initiatives

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On Jun 20, we initiated coverage on SkyWest, Inc. (SKYW - Free Report) , which operates as a regional airline in the United States through its subsidiaries — SkyWest Airlines and ExpressJet Airlines. Apart from the two scheduled passenger airline operations, SkyWest is the holding company of an aircraft leasing entity.

Upbeat Price Performance

In a year’s time, SkyWest has performed exceedingly well, handily outperforming its industry. While shares of the company have surged 57.3%, the industry shed 10.9% of its value.

 

Reasons Behind the Impressive Price Performance

We are impressed by SkyWest’s efforts to modernize its fleet and streamline operations. The company aims to reduce the 50-seat jets in its fleet and add new E175 aircraft. In line with its fleet transition efforts, SkyWest has witnessed a 4.5% year-over-year decline in block hours (a measure of aircraft utilization) in the first five months of 2018. Also, the carrier has added 19 new E175 planes to its fleet and removed 71 unproductive/less-profitable aircraft from its fleet since the first quarter of 2017.

This Zacks Rank #2 (Buy) company’s efforts to reward shareholders through dividends and buybacks are also commendable. To this end, SkyWest increased its quarterly dividend payment by 25% to 10 cents per share (40 cents annualized) in February 2018. In terms of buybacks, the carrier repurchased shares worth $10 million (under the $100 million buyback program authorized in 2017) in the first quarter of 2018.  You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Other transportation stocks like Southwest Airlines Co. (LUV - Free Report) , Canadian Pacific Railway Ltd. (CP - Free Report) and Expeditors International of Washington, Inc. (EXPD - Free Report) also raised dividend payouts this year.

In fact, we believe the new tax law is an added positive for US-based transportation companies like SkyWest. In the first quarter of 2018, effective tax rate reduced to 19% from 34% a year ago. Even though tax rate is expected to be a bit higher in the remaining quarters of 2018, the projected effective tax rate in the 24-25% range is still much lower than the 2017 actual figure. The significant cut in corporate tax rate is anticipated to boost cash flow, which in turn, might aid their bottom-line growth.

With the U.S. economy improving and consumer confidence remaining strong, more Americans are taking vacations. Also, a much-improved job market and rising disposable income have added an incentive for consumers to opt for air travel. This bodes well for US-based carriers like SkyWest. Given this buoyant scenario, the ongoing summer season should see SkyWest garnering significant passenger revenues, which is a boon for the carrier.

Estimate Revisions & Style Score

Upward estimate revisions reflect optimism in a stock’s prospects. SkyWest scores impressively on this front as well. Over the last 60 days, the Zacks Consensus Estimate for current-year earnings moved north 5.2%, reflecting positive sentiment surrounding the stock.

Additionally, the stock has an attractive VGM Score of A. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores.

Such a score allows investors to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score.

Our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 or 2 offer the best upside potential.

Taking into account the above-mentioned tailwinds and the favorable readings, we believe that the current price represents an attractive entry point for investors. The carrier’s bullish Zacks Rank also supports our view.

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