Rating Update: Stock Rating A-Highest (5/16/19)-SkyWest Inc (SKYW).

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BUSINESS

SkyWest, Inc., through its subsidiaries, operates a regional airline in the United States. As of December 31, 2017, it provided scheduled passenger and air freight services with approximately 2,980 total daily departures to various destinations in the United States, Canada, Mexico, and the Caribbean; and had a fleet of 595 aircraft available for scheduled service. The company operates its flights as Delta Connection, United Express, American Eagle, or Alaska under code-share arrangements. It also offers regional jet service to airports; and airport customer and ground handling services for other airlines throughout its system. SkyWest, Inc. was founded in 1972 and is headquartered in St. George, Utah.
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INVESTMENT RATING

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Reflecting future returns on capital that are forecasted to be above the cost of capital, SKYW is expected to continue to be an important Value Builder.

SkyWest has a current Value Trend Rating of A (Highest Rating).
This rating combines highly consistent signals from two proprietary PTR measures of a stock’s attractiveness. SkyWest has a slightly positive Appreciation Score of 68 and a slightly positive Power Rating of 69, producing the Highest Value Trend Rating.

SkyWest’s stock is selling well below targeted value. The current stock price of $59.66 compares to targeted value 12 months forward of $95.
This moderately high appreciation potential results in an appreciation score of 68 (only 32% of the universe has greater appreciation potential.)
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SkyWest has a Power Rating of 69. (SKYW’s slightly positive Power Rating indicates that it has a higher likelihood of achieving favorable investment performance over the near to intermediate term than all but 31% of companies in the universe.)
Factors contributing to this slightly positive Power Rating include: the recent trend in SKYW’s earnings estimates has been extremely favorable; is in a strong phase current; and recent price action has been neutral.

INVESTMENT PROFILE

SkyWest’s financial strength is average. Financial strength rating is 46.
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Relative to the S&P 500 Composite, SkyWest Inc has neutral Growth/Value characteristics; its appeal is likely to be to investors neutral towards Income; the perception is that SKYW is extremely high risk. High historical growth is a positive for SkyWest. Relative weaknesses include: low historical profitability, low financial strength, high stock price volatility, high financial leverage, and high earnings variability. SkyWest’s valuation is low: low dividend yield, low P/E ratio, and low price/book ratio. SKYW has unusually low market capitalization.

CURRENT SIGNALS

SkyWest’s current operations are eroding. Return on equity is falling, reflecting: falling asset utilization; and falling tax keep rate.

SkyWest’s current technical position is mixed. The stock price is in a 4.4 month up move. The stock has appreciated 42.7% from its prior low. The 200 day moving average is in a downtrend. The stock price is above its 200 day moving average. The 200 day moving average has just turned down.

ALERTS

SkyWest Inc (NASDAQ: SKYW). Significant negative changes in investment behavior have recently occurred: its longer term price trend turned down.
Moderate positive changes in SkyWest Inc (NASDAQ: SKYW) fundamentals have recently occurred. Positive developments: the consensus estimate for December, 2020 increased significantly, and the consensus estimate for December, 2019 increased significantly. Negative development: significant quarterly sales deceleration occurred.
The stock is currently rated A.
SkyWest Inc (NASDAQ: SKYW) stock closed at $2.27 on 5/16/19 after a major increase of 13.5%. However, below average trading volume at 80% of normal accompanied the advance. The stock is unchanged during the last week and has performed in line with the market over the last nine months.

CASH FLOW

In 2018, SkyWest experienced no change in cash of +$4.0 million (+1%). Sources of cash balanced uses. Cash generated from 2018 EBITDA totalled +$808.9 million. Non-operating sources contributed +$13.9 million (+2% of EBITDA). Cash taxes contributed +$13.2 million (+2% of EBITDA). Re-investment in the business amounted to -$1,112.6 million (-138% of EBITDA). On a net basis, debt investors furnished +$351.0 million (+43% of EBITDA) while equity investors withdrew -$70.4 million (-9% of EBITDA).
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SkyWest’s Non-operating Income, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Skywest Inc Peer Group. (Since 2016 Non-operating Income, %EBITDA has experienced a very sharp recovery.) In most years, SkyWest was in the top quartile and third quartile. Currently, SkyWest is at the upper quartile at +2% of EBITDA (+$13.9 million).

SkyWest’s Cash Taxes, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by stability for the Skywest Inc Peer Group. In most years, SkyWest was in the top quartile and second quartile. Currently, SkyWest is upper quartile at +2% of EBITDA (+$13.2 million).

SkyWest’s Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Skywest Inc Peer Group. In most years, SkyWest was in the third quartile and second quartile. Currently, SkyWest is substantially below median at -138% of EBITDA (-$1,112.6 million).

SkyWest’s Debt Investors, %EBITDA has experienced a very strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Skywest Inc Peer Group. In most years, SkyWest was in the top quartile and third quartile. Currently, SkyWest is above median at +43% of EBITDA (+$351.0 million).

SkyWest’s Equity Investors, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by a downtrend for the Skywest Inc Peer Group. (Since 2016 Equity Investors, %EBITDA has experienced a very sharp decline.) In most years, SkyWest was in the second quartile and lower quartile. Currently, SkyWest is slightly above median at -9% of EBITDA (-$70.4 million).

SkyWest’s Change in Cash, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Skywest Inc Peer Group. In most years, SkyWest was in the lower quartile and top quartile. Currently, SkyWest is slightly below median at +0% of EBITDA (+$4.0 million).
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SkyWest’s Cash, %Revenue has experienced a small downtrend over the period. This downtrend was accompanied by stability for the Skywest Inc Peer Group. In most years, SkyWest was in the second quartile. Currently, SkyWest is at the upper quartile at +21%.

PROFITABILITY

SkyWest’s return on equity has improved very significantly since 2009 even as it experienced a very sharp decline after the 2017 high.
The key to the story for SKYW is a very strong positive trend in pretax operating return significantly augmented by a very strong positive trend in non-operating factors.
The productivity of SkyWest’s assets declined over the full period 2009-2019: asset turnover has suffered a strong overall downtrend that acccelerated very sharply after the 2011 level.
More than offsetting this trend, however, pretax margin enjoyed a volatile overall uptrend that accelerated very sharply from the 2016 level.
Non-operating factors (income taxes and financial leverage) had a very significant positive influence on return on equity.
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SkyWest’s return on equity is at the upper quartile (15.7%) for the four quarters ended March, 2019.
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Operating performance (pretax return on assets) is at the upper quartile (6.3%) reflecting asset turnover that is below median (0.48X) and pretax margin at the upper quartile (13.1%).
Tax “keep” rate (income tax management) is at median (76.0%) resulting in after tax return on assets that is above median.
Financial leverage (leverage) is at the upper quartile (3.27X).

GROWTH RATES

There are no significant differences between SkyWest’s longer term growth and growth in recent years.
SkyWest’s historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has exceeded equity growth.

Annual revenue growth has been 1.3% per year.

Total asset growth has been 4.8% per year.

Annual E.P.S. growth has been 20.0% per year.

Equity growth has been 4.2% per year. (More recently it has been 13.8%.)

SkyWest’s consensus growth rate forecast (average of Wall Street analysts) is 9.6% — in line with the average of the historical growth measures.
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Relative to the Skywest Inc Peer Group, SkyWest’s historical growth measures are erratic. E.P.S. growth (20.0%) has been at the upper quartile. Total asset growth (4.8%) has been above median. Revenue growth (1.3%) has been below median. Equity growth (4.2%) has been slightly below median.

Consensus growth forecast (9.6%) is lower quartile.
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PRICE HISTORY

Over the full time period, SkyWest’s stock price performance has been variable and superior. Between July, 2008 and May, 2019, SkyWest’s stock price rose +292%; relative to the market, this was a +73% gain. Significant price moves during the period: 1) January, 2016 – August, 2018: +335%; 2) September, 2014 – November, 2015: +165%; 3) November, 2013 – September, 2014: -54%; 4) June, 2012 – March, 2013: +146%; and 5) March, 2011 – June, 2012: -61%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 9.1% is slightly below median relative to the S&P 500 Composite.
In addition to being slightly below median relative to S&P 500 Composite, current annual total return performance through April, 2019 of 9.1% is above median relative to SkyWest Inc Peer Group.

Current 5-year total return performance of 40.9% is upper quartile relative to the S&P 500 Composite.
Through April, 2019, with upper quartile current 5-year total return of 40.9% relative to S&P 500 Composite, SkyWest’s total return performance is upper quartile relative to SkyWest Inc Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, SKYW’s overall valuation is quite low. The highest factor, the ratio of enterprise value/earnings before interest and taxes, is at the lower quartile. Ratio of enterprise value/assets is lower quartile. Ratio of enterprise value/revenue is near the lower quartile. Price/earnings ratio is lower quartile. The lowest factor, the price/equity ratio, is lower quartile.

Relative to SkyWest Inc Peer Group, SKYW’s overall valuation is quite low. The highest factor, the price/equity ratio, is below median. Ratio of enterprise value/assets is at the lower quartile. Ratio of enterprise value/earnings before interest and taxes is lower quartile. Ratio of enterprise value/revenue is below median. The lowest factor, the price/earnings ratio, is lower quartile.
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SkyWest has a major value gap compared to the median valuation. For SKYW to rise to median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 1.72X to 2.39X. If SKYW’s ratio of enterprise value/revenue were to rise to 2.39X, its stock price would be lower by $42 to $102.
For SKYW to hit lower quartile valuation relative to the SkyWest Inc Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 1.72X to 1.24X. If SKYW’s ratio of enterprise value/revenue were to fall to 1.24X, its stock price would decline by $-30 from the current level of $60.

VALUE TARGETS

Reflecting future returns on capital that are forecasted to be above the cost of capital, SKYW is expected to continue to be an important Value Builder.
SkyWest’s current Price Target of $99 represents a +67% change from the current price of $59.66.
This moderately high appreciation potential results in an appreciation score of 68 (only 32% of the universe has greater appreciation potential.)
Reinforcing this moderately high Appreciation Score of 68, the moderately high Power Rating of 69 contributes to an Value Trend Rating of A.
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SkyWest’s current Price Target is $99 (+31% from the 2018 Target of $76 and +67% from the 05/16/19 price of $59.66). This rise in the Target is the result of a +6% increase in the equity base and a +24% increase in the price/equity multiple. The forecasted increase in growth has a very large positive impact on the price/equity multiple and the forecasted increase in return on equity has a large positive impact as well. Partially offsetting these Drivers, the forecasted increase in cost of equity has a large negative impact.
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PTR’s return on equity forecast is 15.8% — slightly above our recent forecasts. Forecasted return on equity enjoyed a dramatic, variable increase between 2010 and 2018. The current forecast is significantly above the 2011 low of 4%.

PTR’s growth forecast is 5.0% — slightly above our recent forecasts. Forecasted growth suffered a dramatic, steady decline between 2010 and 2018. The current forecast is well below the 2011 peak of 10%.

PTR’s cost of equity forecast is 9.1% — in line with recent levels. Forecasted cost of equity erratic but little changed between 2010 and 2018. The current forecast is above the 2014 low of 6.4%.
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At SkyWest’s current price of $59.66, investors are placing a negative value of $-11 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 1.0% per year, and a return on equity of 13.6% versus a cost of equity of 7.7%.
PTR’s 2020 Price Target of $99 is based on these forecasts and reflects an estimated value of existing assets of $74 and a value of future investments of $25.

About John Lafferty 44922 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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