This value stock jumped 7% after earnings, but it’s still a bargain

Shares of SkyWest (SKYW -1.31%) lost nearly half of their value in the first half of 2022 as staffing issues forced the company to scale back short-term flight plans. An increase in pilot compensation in the regional airline industry has also contributed to investor angst.

However, last Thursday, SkyWest reported better than expected second quarter results. And although SkyWest stock jumped 7% after the earnings report, it still has huge upside potential over the next few years.

Earnings better than feared

Earlier this year, SkyWest management warned investors that the company had seen a surge in attrition among its captains. While SkyWest has enough pilots in total, it has more co-pilots than captains, with every flight needing one of each.

This workforce imbalance has forced it to reduce its flight plans for 2022, which has had a negative impact on its revenue and profitability forecasts. As a result, SkyWest CEO Chip Childs estimated the company would post roughly even results for the full year.

Fortunately, this orientation turned out to be conservative. In the first quarter, SkyWest posted earnings per share (EPS) of $0.35, smashing analyst consensus of $0.01. Last week, the company announced even better results for the seasonal second quarter. Revenue hit $799 million, eclipsing pre-pandemic levels. Meanwhile, SkyWest posted EPS of $1.07, easily beating analyst consensus of $0.45.

SkyWest’s earnings are still below its Q2 2019 EPS of $1.71, due to higher maintenance and labor expenses and lower asset utilization. SkyWest executives also said labor constraints and cost pressures are likely to worsen in the second half. Still, the company earned $1.42 per share in the first half of 2022 and expects to be modestly profitable for the rest of the year, putting it on track for much better results than it had. initially predicted.

Image source: SkyWest.

Headwinds to carry on

While SkyWest’s full-year guidance has improved from February, the company isn’t off the hook just yet. Management currently believes that the captain’s availability will limit the carrier’s flight schedules until at least the end of 2023, or even early 2024.

Along the same lines, SkyWest plans to significantly increase pilot salaries soon, especially for captains. It has little choice if it wants to retain and recruit enough pilots, especially after American airlines significantly increased pilot compensation at its internal regional subsidiaries in June. But it will put a lot of pressure on SkyWest’s cost structure. Last quarter, the company spent 36% of its revenue on labor costs.

The combined impact of personnel constraints and higher pilot compensation will weigh on SkyWest’s earning power throughout 2023. In fact, analyst consensus calls for SkyWest’s EPS to rise from $2.06 this year to $1.34 next year.

Always worth a look

Despite these challenges, shares of SkyWest could be very profitable for long-term investors. Most notably, the company’s market capitalization of $1.2 billion is still a nearly 50% reduction from SkyWest’s book value of $2.3 billion.

SKYW Market Cap Chart

SkyWest market capitalization vs. book value, data by Y-Charts.

This spread reflects the low returns SkyWest’s assets are currently generating. However, if the company can correct its pilot imbalance by 2024 (mainly by increasing salaries to improve retention), it will be able to increase asset utilization to around pre-pandemic levels. And since all regional airlines face similar labor cost headwinds, SkyWest should be able to negotiate higher fees for its services over the next few years to offset the higher compensation. high pilots.

At the same time, SkyWest plans to open a new charter subsidiary that will use CRJ200 jets equipped with 30 seats instead of the usual 50. This will allow this subsidiary to operate under different regulations which will facilitate the recruitment of pilots. This move could put some of SkyWest’s idle assets into productive use as early as next quarter.

Permanently higher pilot pay could prevent SkyWest from regaining its pre-pandemic earning power for the foreseeable future. (In 2019, it posted adjusted EPS of $6.25.) But I think the company has a good chance of generating annual EPS of at least $4-5 within a few years. That makes SkyWest an attractive — albeit high-risk — value stock based on its Tuesday closing price of $24.05.

About Alexander Estrada

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