Transports are down 16% since September - but that doesn’t make SKYW a good bargain

December 10, 2018

Transports are down 16% since September – but that doesn’t make SKYW a good bargain

The market hasn’t been kind to the Transportation sector since the end of the third quarter of the year. As measured by the S&P Transportation SPDR ETF (XTN), the sector declined from its 52-week highs at the beginning of September nearly 20% by Halloween before staging a temporary rally through November. Since the beginning of the month, however the sector has dropped back near to its yearly lows.

In the last week, I’ve seen the sector’s decline in price has actually started to get some analysts talking about airline stocks as good bargains right now. Airlines make up about 1/3 of the sector, at least if you work off of the latest list of stocks held by XTN; but since four of the top five stocks in the ETF are airlines, it isn’t necessarily an unreasonable conclusion. The problem with that idea is that it works almost exclusively off of the basis of price decline.



One interesting element of the holiday season is the fact that a lot of people are going to be traveling, and that does suggest that business in airlines is likely to be pretty healthy this month, so a play on airline stocks might be tempting right now. Smaller, regional carriers like SkyWest, Inc. (SKYW) seem likely to benefit from the holiday traveling season as most folks using air travel aren’t likely to be taking transcontinental or overseas trips.

SKYW is an interesting company, since it partners with just about every one of the major airlines to provide regional services under their respective name (think Delta Connection or United Express, for example). This is a small-cap company with some solid fundamental measurements that make it a stock worth paying attention to, and one that I think deserves a place on your watchlist, especially if the transportation sector starts to recover. Like the sector, the stock has seen a pretty significant drop in price since September, having declined by a little more than 24% over that period. The value proposition, however isn’t great – in fact, even with the stock’s decline so far, its primary valuation measurements imply the stock remains pretty overvalued. If the sector remains under pressure, the stock’s value proposition will undoubtedly improve, and that is another reason to keep watching both the sector and the stock.



Fundamental and Value Profile

SkyWest, Inc., through its subsidiaries, SkyWest Airlines, Inc. (SkyWest Airlines) and ExpressJet Airlines, Inc. (ExpressJet), operates regional airline operations in the United States. The Company’s segments include SkyWest Airlines, ExpressJet and SkyWest Leasing. The SkyWest Airlines segment provides regional jet service to airports primarily located in the Midwestern and Western United States, as well as Mexico and Canada. The ExpressJet segment provides regional jet service to airports primarily located in the Eastern and Midwestern United States, as well as Mexico, Canada and the Caribbean. The SkyWest Leasing segment includes its E175 aircraft ownership business. As of December 31, 2016, the Company offered scheduled passenger service with approximately 3,160 daily departures to destinations in the United States, Canada, Mexico and the Caribbean. The Company’s flights are operated as Delta Connection, United Express, American Eagle or Alaska Airlines. SKYW’s current market cap is $2.6 billion.

  • Earnings and Sales Growth: Over the last twelve months, earnings increased more than 55%, while sales were mostly flat, at -.32%. Over the last quarter, earnings improved almost 10%, and sales increased nearly 3%. Over the next year, industry experts are forecasting only about 3% growth in revenues for the entire airline industry. The company also operates with a healthy margin profile that has nonetheless been declining, as Net Income dropped from more than 15% of Revenues over the last twelve months to 10% in the last quarter.
  • Free Cash Flow: SKYW’s free cash flow is negative, by more than -$220 million; I read that as a confirmation of the warning sign from the stock’s deteriorating margin profile.
  • Debt to Equity: SKYW has a debt/equity ratio of 1.43. This number has been increasing in each of the last two quarters. Their balance sheet indicates that operating profits are sufficient to service their debt, but the fact is that while Free Cash Flow has been declining, debt has been increasing since early 2014, from only about $1.2 billion to more than $2.7 billion in the last quarter.
  • Dividend: SKYW pays an annual dividend of $.40 per share, which translates to an annual yield that of about .8%.
  • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for SKYW is $37.04, and which translates to a Price/Book ratio of 1.34 at the stock’s current price. Their historical average Price/Book ratio, however is only .96, which puts a long-term target price at about $35 per share. The stock’s Price/Cash Flow ratio makes the stock look even riskier since it is a little over 40% its historical average.



Technical Profile

Here’s a look at the stock’s latest technical chart.

 

  • Current Price Action/Trends and Pivots: The stock is reaching an interesting technical juncture right now; if the stock can stabilize anywhere between $47 per share and its current price, followed a new pivot reversal and rally, it could mark the final leg of a Double Bottom formation. One of the reasons that pattern is useful for traders as a bullish signal comes from the fact that it takes time to develop.  The pattern is confirmed, and should be taken as a strong indication of a bullish trend reversal, if the stock manages to break above $58 per share. One the other hand, a break below $47 would invalidate the Double Bottom pattern, with the next most likely support level around $39 per share.
  • Near-term Keys: The fact is that the stock doesn’t offer a compelling value proposition right now. The strength of the stock’s downward trend since September should discourage you from looking for a bullish trade until and unless it does actually provide pattern confirmation with a break above $58 per share. If the stock does break down and invalidate the Double Bottom formation, you should strongly consider shorting the stock or working with put options, with an eye towards the $39 to $40 price level as an exit target.