SkyWest (SKYW): Volatile, but worth a look

By J. Royden Ward, Editor of Cabot Benjamin Graham Value Letter

From Cabot Wealth Advisory 8/16/10 Sign up for free Cabot Wealth Advisory e-newsletter

Shares of a smaller airline that we follow, SkyWest (SKYW), are underpriced and offer an attractive dividend. One of the largest commuter airlines, SkyWest provides short-haul service to 218 cities in the U.S., Canada, Mexico, and the Caribbean. Connecting flights are operated as Delta Connection and United Express under arrangements with Delta and United Airlines.

The company recently ended its affiliation with Midwest, which will have little effect on SkyWest’s earnings. Delta and United control SkyWest’s scheduling, ticketing, and pricing and receive a percentage of revenues. SkyWest is reimbursed for most fuel costs. The company is in litigation with Delta concerning expense reimbursements, but we doubt future arrangements between the two airlines will be jeopardized.

SkyWest announced recently that it has entered into a definitive merger agreement with ExpressJet Holdings. Atlantic Southeast Airlines, SkyWest’s wholly owned subsidiary, will acquire all of the outstanding common stock of ExpressJet Holdings for a net purchase price of approximately $133 million cash. ExpressJet Airlines serves 135 scheduled destinations in North America and the Caribbean with approximately 1,400 departures per day. The company provides commuter flights for United and Continental, private charter flights and third-party ground handling services.  

The pick-up in airline travel is now beginning to show its effects as evidenced by SkyWest’s 9.2% increase in passenger revenue miles during the two-month period ending 5/31/10. SKYW has over $12 per share in cash ready to expand its operations. The company added new contracts with AirTran and expanded its agreements with United Airlines. SkyWest will likely win additional new business during the next few quarters. The company is interested in adding routes to Asia. EPS will probably increase by a minimal amount in 2010 followed by a 15% EPS surge in 2011.

SKYW shares are undervalued at only 0.50 times current book value and 7.9 times EPS. We foresee major changes in the airline industry that will favor commuter carriers such as SKYW. The company’s dividend yield of 1.3% is attractive. SKYW shares are volatile, but well worth a look.

Editor’s Note: You can find additional stocks selling at bargain prices in the Cabot Benjamin Graham Value Letter. In every issue, you’ll find my legendary Maximum Buy and Minimum Sell Prices for over 250 stocks. Click here to get started today: More on Cabot Benjamin Graham Value Letter.

Roy Ward
J. Royden Ward

Editor of Cabot Benjamin Graham Value Letter
A lifelong investment professional, J. Royden Ward applies his 40 years of investment research, portfolio management, writing and publishing experience to his role as analyst and editor of Cabot Benjamin Graham Value Letter, which is directed to long-term investors seeking a guide to profitable value investing based on the time-tested systems originally developed by Benjamin Graham, the Father of Value Investing. A second-generation disciple of Benjamin Graham, Roy in 1969 pioneered the development of a computerized model that applied the formulas developed by Graham using a unique ranking system. Today, Roy applies his system to two models in the Value Letter.