Raymond James gains confidence in SkyWest; Upgrades to Outperform

Raymond James upgraded SkyWest Inc. (NASDAQ:) to an Outperform rating (from Market Perform) and set a 12-month price target of $55.00 for the stock due to growing confidence in the ongoing positive trajectory of pilot trends. This optimism is driven by expectations that U.S. mainline and cargo airlines will experience a controlled growth rate (including pilot recruitment) as we move towards 2024.

Consequently, confidence in projected earnings recovery strengthens. However, Raymond James adjusted EPS estimates for 2023, 2024, and 2025 from $0.40, $6.30, and $7.55 to $0.32, $6.00, and $7.45 respectively. This revision accounts for a reduced contribution from the prorate segment in the latter half of 2023 and a somewhat more cautious approach to executing the stock repurchase program, now expected to be completed by the end of 2024 rather than the previously anticipated end of 2023.

“As the current captain shortage starts to be addressed, SkyWest should be able to increase block hours by 30% with limited additional investment, driving significant earnings recovery,” wrote analysts in a note.

In the first half of 2023, there was a setback in revenue recognition amounting to $123 million, and an additional $120M setback is foreseen for the second half of 2023. They anticipate that this setback will transform into a positive outcome of $50M in 2024, contributing to a significant portion of the projected $305M year-over-year pre-tax income shift. Furthermore, this favorable trend is expected to escalate to $70M in 2025, resulting in a $20M year-over-year improvement.

“While the recent substantial regional pilot pay increase is likely to shrink the overall regional industry opportunity, we believe SkyWest has demonstrated the ability to leverage its scale, expertise, and healthy balance sheet to consolidate its position in the regional sector by being part of the solution for its partners as they navigate the recovery.”

Shares of SKYW are up 7.05% in afternoon trading Thursday.