Traditionally, I like to stay away from airlines; their earnings are unpredictable, they are highly dependent upon fuel costs, and fixed costs are high, which means the earnings are generally erratic. However, when a company is trading for less than the value of its assets, the value investor in me finds the opportunity almost too hard to pass up.
Regional carrier SkyWest, Inc. (NASDAQ:SKYW) currently offers value. Book value stands at $26.50 per share, which is a price-to-book value of 0.5 at current prices. What's more, the company actually conforms to most of Benjamin Graham's value investment criteria, making the company look highly appealing as an investment opportunity.
Firstly, as of the last quarter, SkyWest, Inc. (NASDAQ:SKYW) had a current ratio of 2.5, above Graham's required ratio of 2. Long-term debt as of the second quarter stood at $1.6 billion, and unfortunately this figure is greater than the firm's net asset value of $851 million. However, the net debt to asset ratio was only 21 percent.
When it comes to Graham's earnings criteria, SkyWest, Inc. (NASDAQ:SKYW) falls down. The company only had positive earnings in 9 out of the past 10 years and earnings-per-share have fallen 30 percent over the past ten years. Although, as I have already mentioned, the airline industry is highly unpredictable and very few carriers have managed to consistently increase earnings over the past ten years, for the obvious economic reasons.
Having said all that, I still believe SkyWest, Inc. (NASDAQ:SKYW)'s low valuation makes the company look highly attractive, especially when compared to the valuations of its peers.
For a start, the company's price-to-book value is 75 percent below the region's carrier sector average, which stands at 2x. In addition, SkyWest's price-to-sales ratio is 0.2, once again below the sector average of 0.5.
What's more, the company is undervalued based on its own historic valuations. For example, on an EV/Revenue valuation, the company currently trades at 0.45x, below the figures of 0.62x and 0.83x reported in 2008 and 2009 respectively. Furthermore, on a Free cash flow/market cap. Multiple, the company trades at a ratio of 28.2 percent, compared to its historic average of <20 percent.
SkyWest looks undervalued
So all in all, SkyWest looks relatively undervalued, not just compared to itself but compared to the rest of the industry as well. Moreover, the carrier has a strong balance sheet, and net debt has fallen year-on-year by 19 percent from the second quarter of 2012; no intangibles bulk up the asset base.
The main reason behind the recent weakness in SkyWest, Inc. (NASDAQ:SKYW)'s stock price has been a result of the DoJ's actions which blocked the merger of American and U.S. Airways. Many investors have viewed this action as negative for industry-wide pricing powers and margins, fearing a price war and have, as a result, jumped out of airline stock.
Still, this could also open up the industry to a way of consolidations among the smaller carriers, and SkyWest appears to be ripe for a buy-out as it trades on one of the lowest valuations in the sector.
Overall, SkyWest, Inc. (NASDAQ:SKYW)'s value is obvious; the company is trading significantly below book value with a strong balance sheet and some of lowest valuations in the sector.