On Monday, Nasdaq companies were sinking much faster than those that were charging higher.
In fact, the declining stocks outpaced growing securities by a three-to-one margin!
While the broader index closed down by 20.82 points, there were some bright spots in the day.
SkyWest (SKYW) bucked the downtrend, and saw its shares fly 7.74% higher on moderate volume.
Shares of the St. George, Utah regional airline closed at $8.35 with more than 737,000 shares changing hands, compared to its 30-day average volume of 437,000 shares. The company operates the largest regional airline in the United States – through SkyWest Airlines and ExpressJet Airlines.
At one point, the stock had climbed more than 12.9% since closing at a low of $7.39 on October 1, 2014.
What was the catalyst for the sudden takeoff – and, more importantly, does the surge represent a buying opportunity in SkyWest?
Well, the impetus behind Monday’s move was an upgrade from Raymond James to “market outperform,” with a price target of $10 per share.
But the real question is whether the stock is attractive at this price, given that the James’ target price is less than $2 away.
A closer look at the stock shows significant problems for the airline, not the least of which is a stock chart that shows SKYW shares spiraling downward by 44% in just the last 12 months – and more than 76% since reaching a high in November 2005.
Clearly, SkyWest has been struggling for some time now.
To be sure, Raymond James is basing its upgrade on the news that the company will see a large number of its unprofitable 50-seat aircraft contracts expire in the second half of 2014, with another 101 unprofitable contracts set to expire by the end of 2015.
But is this enough to justify buying shares in the struggling carrier?
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In the company’s Q2 2014 filings, SkyWest reported a net loss of $14.7 million, or
a loss of $0.29 per diluted share. This compares to net income of $20.7 million, or $0.39 per diluted share for the second quarter of 2013 – representing a decrease of 171% year over year.
SkyWest’s operating revenue fell 3% to $816.6 million in the second quarter, well below analysts’ consensus of $849 million. Adding insult to injury, the number of paying passengers also fell 3%.
The company’s operating profit margin plunged from 6% to 1.6% of revenue. Interestingly, the company’s total operating profit of $13.2 million was insufficient to cover the $16.1 million in interest expenses.
Overall, SKYW generated just $32.5 million in operating cash flow through the first half of 2014, down from $129.3 million in the same period last year – a whopping decrease of 74.8%.
Unfortunately, the future doesn’t look significantly brighter…
You see, the company achieved lower-than-anticipated performance incentive bonuses under its contracts and had unfavorable flying contract settlements that will continue to affect revenue.
Additionally, the company is experiencing much higher costs for pilot training since last August, when federal regulations raised the number of hours required for airline pilots to fly from 250 to 1,500.
These new rules make training significantly more expensive, and they’re particularly hard on regional airlines, where most new pilots begin their flying careers.
Given the company’s weak financial results and falling estimates, prudent investors would be well served to avoid SkyWest shares – at least until its earnings “thrust” is completely clear of turbulence.