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SkyWest (SKYW) Stock Rallies 15% Year to Date: Here's Why

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SkyWest (SKYW) Stock Rallies 15% Year to Date: Here's Why

Fleet modernization initiatives and lower tax rates bode well for SkyWest (SKYW).

Shares of SkyWest, Inc. SKYW have gained 15% so far this year against the industry's 16.7% decline.

 

 

Reasons Behind the Impressive Price Performance

SkyWest reported better-than-expected earnings and revenues in the second quarter of 2018. Moreover, the bottom line expanded 50.5% on a year-over-year basis. The top line benefited from the company’s improved fleet mix. In addition, the company has an impressive earnings history, having outshined the Zacks Consensus Estimate in each of the trailing four quarters with an average beat of 14%.

We expect SkyWest to outperform in the third quarter as well. Results in the third quarter are expected to be aided by the carrier's fleet transition efforts among other things. With the U.S. economy improving and consumer confidence remaining strong, more Americans are taking vacations. Also, a much-improved job market and rising disposable income are an added incentive for consumers to opt for air travel. This bodes well for US-based carriers like SkyWest.

This apart, SkyWest’s initiatives to modernize its fleet and streamline operations are encouraging. The company aims to reduce the 50-seat jets in its fleet and add new E175 aircraft. In line with its fleet transition efforts, SkyWest has witnessed a 4.8% year-over-year decline in block hours (a measure of aircraft utilization) in the first six months of 2018. Also, the carrier has added 23 new E175 planes to its fleet and removed 34 unproductive/less-profitable aircraft from its fleet since the second quarter of 2017.

Furthermore, the company’s efforts to reward shareholders, through dividends and buybacks are commendable. To this end, SkyWest increased its quarterly dividend payment by 25% to 10 cents per share (40 cents annualized) in February 2018. In terms of buybacks, the carrier currently has $70 million remaining under the $100 million buyback program authorized in 2017.

Other transportation stocks like Southwest Airlines Co. LUV, Canadian Pacific Railway Ltd. CP and Expeditors International of Washington, Inc. EXPD also raised dividend payouts this year.

In fact, we believe the new tax law proved beneficial for US-based transportation companies like SkyWest. In the second quarter of 2018, effective tax rate reduced to 23% from 38% a year ago. Even though tax rate is expected to be a bit higher in the remaining quarters of 2018, the projected effective tax rate of 25% is still much lower than the 2017 actual figure. The significant cut in corporate tax rate should boost cash flow, which in turn, might aid their bottom-line growth.

Estimate Revisions & Style Score

Upward estimate revisions reflect optimism in a stock’s prospects. SkyWest scores impressively on this front as well. Over the last 60 days, the Zacks Consensus Estimate for current-year earnings moved north 6%, reflecting positive sentiment surrounding this Zacks Rank# 1 (Strong Buy) stock.  You can see the complete list of today’s Zacks #1 Rank stocks here.

Additionally, the stock has an attractive VGM Score of B. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores.

Such a score allows investors to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score.

Our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 or 2 offer the best upside potential.

 

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