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SkyWest’s (NASDAQ:SKYW) recent positive Q4 2023 earnings results indicate that the company could thrive in 2024. The company is expected to grow revenue and earnings at a strong pace in 2024 according to consensus estimates. This is a result of SkyWest’s efforts to capitalize on industry tailwinds. SkyWest’s low valuation leaves plenty of room for the upside for the stock.
SkyWest operates SkyWest Airlines and SkyWest Leasing. SkyWest Airlines operates a fleet of about 500 aircraft to more than 240 destinations in North America. The company has partnerships with other airlines such as American Airlines (AAL), Delta (DAL), Alaska Air Group (ALK), and United Airlines (UAL).
What The Q4 2023 Earnings Report Indicates for 2024
Overall, SkyWest achieved positive results in Q4 2023. Revenue increased 10% to $752 million in Q4 2023 over Q4 2022. However, the company did fall short of analysts’ consensus revenue expectations by $6.65 million for Q4. SkyWest’s revenue benefitted from flying contract rate increases and 2% higher production in Q4. SkyWest achieved a significant gain in net income to $18 million or $0.42 per diluted share in Q4 2023 as compared to a net loss of $47 million or $0.93 loss in Q4 2022. SkyWest exceeded consensus EPS estimates of $0.23 by 83% or $0.19.
SkyWest’s efforts in attaining improved profitability in Q4 2023 over Q4 2022 can have lasting effects during 2024. SkyWest enhanced its compensation packages for employees which can reduce attrition and lower training/turnover costs. The company also expects 2024 to be more profitable than 2023 as a result of higher expected production. However, SkyWest did not give specific EPS estimates for 2024. Analysts’ consensus estimates are calling for a 13% to 14% revenue gain to $3.33 billion and a 731% EPS increase to $6.40 for 2024.
The company completed its acquisition of a 25% stake in Contour Airlines. This is a strategic move that gives SkyWest a new pipeline for pilot supply and allows the company to further monetize its Bombardier CRJ200 aircraft and engines in underserved communities. SkyWest is seeing strong demand for selling and leasing these assets. The company sold $15 million of its CRJ assets in 2023.
SkyWest has a flying agreement for 19 new E175s and expects to deliver four of them in Q4 2024. The company also expects to deliver seven E175s in 2025 and eight in 2026. SkyWest also placed 19 CRJ700s under contract with United Airlines.
SkyWest is poised to benefit from the expected airline industry growth. Airlines are expected to achieve record revenue in 2024. The total industry revenue is expected to increase 7.6% to $964 billion in 2024. The amount of airline travelers in 2024 is expected to reach 4.7 billion people which is higher than the pre-pandemic level of 4.5 billion from 2019. Passenger revenue for the industry is expected to increase 12% to reach $717 billion in 2024. Operating profits for the airline industry are expected to increase by an impressive 21% to reach $49.3 billion in 2024.
SkyWest is seeing strong demand for its services and is making good moves for growth. The strong demand is evident in SkyWest’s 11% increase in flying agreements in Q4 2023 over Q4 2022. Flying agreements comprise about 97% of SkyWest’s total operating revenue. The company’s investment in Contour helps meet the demand from small communities and allows the deployment of SkyWest’s previously unused CRJ200 assets. Plus, it is likely that the company will benefit from the expected industry growth in 2024. The company is also expected to recognize $50 million to $70 million of deferred revenue in 2024. That’s 15% to 21% of SkyWest’s total expected revenue of $3.33 billion for 2024.
Valuation
SkyWest is trading attractively at only 9x expected EPS of $6.42 for 2024. Allegiant Travel Company (ALGT) a competitor close in market cap to SkyWest, is trading 12x expected EPS of $6.33 for 2024. JetBlue Airways (JBLU) is another competitor with a similar market cap, but the company is not expected to be profitable until about 2026. So, I can’t provide a valid PE ratio comparison in terms of expected earnings for 2024.
For a fair comparison of the unprofitable JetBlue, I will use the price/sales ratio. The good news for JetBlue is that the stock is trading attractively with a low forward price/sales ratio of 0.20x. SkyWest is trading with a higher forward price/sales of 0.72x, while Allegiant trades with a forward price/sales of 0.50x.
Overall, the Airline industry has been valued below the broader market. The Airline industry has a forward PE of 6.7x, while the S&P 500 (SPY) is trading with a forward PE of 22x. This is likely due to the cyclical nature of the airline industry and as a result of the fallout from the COVID-19 pandemic which temporarily reduced travel demand.
The significantly lower valuation of SKYW, ALGT, and JBLU as compared to the broader market, supports my theory that these three stocks may outperform the S&P 500 in 2024. The S&P 500 is expected to grow earnings at 11% in 2024 according to consensus analyst estimates. SKYW is expected to grow earnings at over 700% according to consensus estimates. This unusually high expected growth is due in part to the 13% expected revenue growth from strong travel demand & deferred revenue and from a significant increase in production and an expected improvement in pilot attrition in 2024.
JetBlue is expected to grow EPS at 48% in 2024 with a loss of -$0.67, while Allegiant is expected to experience an EPS decline of about 13% to $6.33 in 2024. So, SkyWest looks to be the potential winner in 2024 with significantly higher expected EPS growth, while its valuation is still attractive.
Technical Perspective
SkyWest (SKYW) Monthly Chart with RSI (Tradingview)
SkyWest’s monthly chart above provides a multiple-year long-term perspective. We can see the sharp rise that the stock experienced prior to the pandemic as travel demand was strong. This was followed by a sharp drop during the pandemic with some choppiness in recent years. The stock just moved into overbought territory according to the RSI (relative strength) indicator (purple RSI line increased slightly above 70).
Just because the stock moved into overbought territory doesn’t mean the rally is over just yet. We can look back and see that SkyWest’s stock moved into overbought territory in 2016 and went even deeper into overbought territory in 2017 and 2018. I think the stock still has room to move higher into deeper overbought territory in 2024 if the company’s news remains positive and if the economy remains strong. If SkyWest can meet/exceed EPS estimates for most quarters in 2024, we could likely see the stock continue higher.
The next resistance level for the stock is in the mid $60s. That should be easily attainable from here, given the positive earnings report and the bright outlook for the airline industry. We’ll have to see if the stock can surpass this resistance zone. This looks possible with continued strong growth and performance.
Balance Sheet/Cash Flow
As of the end of Q4 2023, SkyWest had $835 million in total cash & marketable securities with about $2.6 billion in long-term debt, net of current maturities. While I typically like to see companies run with more total cash than total debt, it is understandable for the capital-intensive airline industry companies to carry a lot of debt. SkyWest does have 1.1x more current liabilities than current assets. However, the company consistently runs with positive operating cash flow which helps to cover its debt obligations.
SkyWest’s annual report (10-K SEC filing) which includes Q4 2023 and the recent cash flow statement was not released at the time this article was written. It is typically released in mid to the latter half of February of each year. The cash flow statement was also not included in the recent press release. However, we can look at the trailing 12-month figures which cover Q4 2022 through Q3 2023. During this period, SkyWest had $649 million in operating cash flow. The company repaid $446 billion of debt and only issued $108 billion in new debt. SkyWest spent $318 million in CapEx and repurchased $247 million of common stock.
It looks like SkyWest can handle its debt while effectively running the business. However, it is important to note that SkyWest needs to issue new debt regularly to fully cover its current liabilities of $1.2 million during that same period. This is one of the main risks for SkyWest in my opinion. If the company ran into a situation where operating cash flow turned negative over a long enough period of time, SkyWest would be at risk of defaulting on its debt. So far, SkyWest has achieved consistent positive cash flow over at least the past 10 years. Hopefully, the positive cash flow will continue as SkyWest’s strategies continue to pay off.
Expense Trends
SkyWest has been spending less on CapEx than in previous years. SkyWest spent $252 million on CapEx in 2023 as compared to $683 million in 2022 and $681 million in 2021. This contributes to a significant increase in free cash flow which can be used for stock buybacks. SkyWest did repurchase 10.6 million shares during 2023 which makes existing shares more valuable for stockholders.
The cost of revenue decreased from 76.5% in Q4 2022 to 75.3%, resulting in the gross margin increasing from 23.5% in Q4 2022 up to 24.7% in Q4 2023. Total operating expenses decreased as a percentage of revenue from 28.7% in Q4 2022 down to 21% in Q4 2023. If SkyWest can continue this trend, it can have a positive impact on earnings growth going forward.
SkyWest also benefitted from lower fuel prices of $85.9 million in 2023 as compared to $108.5 million in 2022. The EIA is projecting the price of jet fuel to average $2.72 per gallon in 2024. This is slightly lower than the average price of $2.75 per gallon from 2023, but it is significantly lower than the average price of $3.39 per gallon from 2022.
SkyWest’s stock tends to be inversely correlated to the price of fuel as shown in the chart below. So, the stock has a good chance of increasing in 2024 as fuel prices are expected to remain much lower than in 2022. Lower fuel prices will help keep a lid on expenses.
SkyWest’s Outlook for 2024
SkyWest’s outlook looks positive for 2024. The near-term risks for SkyWest could be an unexpected significant spike in fuel prices which could reduce earnings growth or an economic downturn which could reduce travel demand. The company is likely to benefit from the airline industry’s expectations of exceeding pre-pandemic levels for air travel in 2024. The valuation still remains attractive even after the recent run-up in the stock. The stock price still remains below the all-time high in the mid $60s from January 2020. I expect SkyWest to outperform the S&P 500 in 2024 as the company’s expected growth is higher and the valuation is lower than that of the broader market.
