The Sky Is Not the Limit for SkyWest
Here's how I'd handle this airline company after its earnings flew past Wall Street's expectations.
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By Stephen Guilfoyle
SkyWest SKYW reported third-quarter financial results Thursday and the stock hasn't stopped going higher since.
The Utah-based regional airliner posted unadjusted earnings per share of $0.56 on revenue of $766.171 million. For those unfamiliar with the SkyWest, it offers roughly 1,600 departures from the United States, Canada and Mexico often under its own banner, but also as such brand names as Delta DAL Connection, United UAL Express, American AMR Eagle, and Alaska Airlines ALK. Despite the revenue number reflecting a 3% year-over-year contraction and that the earnings print was off some 43%, both these top- and bottom-line results beat Wall Street's expectations. Operating expenses increased 0.4% to $716.88 million. This put operating income at $49.29 million (-34.8%). After interest and taxes are accounted for, net income dropped some 51.5% to $23.478 million.
Guidance Not in View
CFO Robert Simmons told us flat out early in the conference call that there would be no specific guidance given. But Simmons did say, "We expect Q4 to be modestly profitable on pre-tax GAAP basis, including approximately $60 million of deferred revenue but seasonally down from Q3 as per normal."
Not exactly awe-inspiring, in my opinion, despite the market's reaction. As for the full year, Simmons said that as "noise" from deferred revenue goes away in 2024, that year's unadjusted earnings per share "could again return to the high $5 handle where we were pre-COVID."
SkyWest's Fundamentals
SkyWest generated operating cash flow of $511.907 million over the nine months ended Sept. 30. Out of this has come capital expenditure of $165.578 million, leaving free cash flow of $346.329 million. Out of this number has come the repurchase of $246.499 million worth of common stock for the corporate Treasury. The company does not pay shareholders a cash dividend. The balance went toward debt repayment and the firm's cash position. Glancing at the balance sheet, SkyWest ended the quarter with a cash position of $125.33 million and inventories of $127.129 million. That put current assets at $1.162 billion. The airline has shorter-term debt of $443.186 million maturing within 12 months, and thus labeled as current. This puts current liabilities at 1.206 billion. This also laced the current ratio at 0.96 and the quick ratio at 0.60. These really are sub-optimal levels for these ratios, especially since SkyWest has a lot of debt that it will almost certainly have to refinance at higher rates. Total assets amount to $7.059 billion, which is really mostly aircraft and rotable spares less depreciation and amortization. Total liabilities less equity comes to $4.922 billion including an additional $2.634 billion in longer-term debt. That's a lot of short-term debt and that's a ton of short-term debt. I am going to have a hard time giving a balance sheet with more than $3 billion in debt-load and just $125 million in cash a pass.
Especially when the portion of that debt that will have to be refinanced at what will likely be far greater expenses is nearly four times cash. This is a red flag for me.
My Take/Trade
I don't see the outlook, nor the balance sheet (which the company referred to as "strong" during the call) as catalyst enough for the stock's 11.6% pop on Friday and the 6.1% run so far on Monday.
Readers will see that these shares had found support in late October just above a 38.2% Fibonacci retracement of the stock's late December through early August run. Let's zoom in:
It looks to me like SKYW had been developing a descending price channel that after this current run, assuming that resistance is hit close to where it hit in late July and early September, will end up looking more like basing period or consolidation. In short, I see this stock in a bearish light as it approaches the $46 level. I like the below sample trade and am likely to implement something close to it after the article goes public and you all have a chance to read it.
Trade Idea (minimal lots)
* Sell short 100 shares of SKYW at or close to $46. * Downside pivot: losing the just gained 50 day SMA (currently $41.36)* Target Price: 36* Panic: $49.
At the time of publication, Guilfoyle had no position in any security mentioned.
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