Regional Airlines Stocks That Can Make A Portfolio Fly

Published Tue, 15 Dec 2015 12:30 CET by

For income-seeking investors, higher-paying dividend stocks are historically considered to generate income and be less volatile. Dividends not only provide a steady stream of income, but they also justify the reasons one has originally invested in a company. Due to prolonged times of exceptionally low interest rates, several industries have been massively leveraged, including the travel industry.

Travel related stocks have been in high demand over the past months, not only because they consistently deliver gains, but also because their gains keep on getting stronger due to the decline in oil prices. In fact, travel demand soars when oil prices slide. In addition, US-based Travel, Hospitality, and Leisure companies are expected to continue looking for international growth opportunities, whereas airlines are expected to employ more asset-light partnerships like OneWorld, that enables passengers to fly on a foreign carrier by booking on a domestic one.
This article discusses three stocks trading in the Regional Airlines Industry.

Alaska Air Group, Allegiant Travel and SkyWest YoY Stock Performance Graph
Alaska Air Group (NYSE: ALK), a Seattle-based holding company, offers, through its subsidiaries, Alaska Airlines and Horizon Air Industries, air transportation passenger and cargo services across the United States. The company currently serves nearly 100 cities in Alaska, the Lower 48, Hawaii, Canada, and Mexico with a fleet of 137 Boeing 737 jet aircraft and 51 Bombardier Q400 turboprop aircraft.

Strong Q3 2015 Results: The company’s decision to add non-stop service to the destinations it serves has proven a very effective strategy that has generated new revenue streams. At the same time, ALK’s cost profile continues to improve. Its non-fuel unit costs decreased 2%, while the industry’s costs have increased 1.4%, thus giving Alaska Air a sustainable advantage. Compared to Q3 2014, Alaska reported strong results in this quarter, as follows:

  • Revenues reached $1.5 billion, up 3.4% YoY
  • Operating income reached $433 million, up 37% YoY
  • Net income reached $274 million, up 38.4% YoY
  • Operating expenses declined to 1.08 billion, down 5.8% YoY
  • Gross profit margin reached 47% from 39%
  • Annualized dividend $0.80 per share, yielding 0.97% at a payout ratio 13%

2016 Outlook: Alaska expects a 13% capacity in Q1 2016 and an overall market growth in all seven markets that it currently operates, planning to expand to another 11 markets in the Q4 2015. The company seeks to continue investing in its product and increase customer satisfaction (current score 86%, an all-time high) by creating a competitive advantage through award-winning customer service, and industry-leading operation. Analysts that follow Alaska Air estimate an average 5-year earnings growth of 16.5% and an average EPS of $6.85, up 11.3% from current EPS of $6.15.

Allegiant Travel Company (Nasdaq: ALGT) is a Las Vegas headquartered travel leisure company engaging on the offering of travel services, including scheduled air transportation on limited frequency nonstop flights to underprivileged cities across the United States. The company also offers third party travel products, including hotel accommodation, ground transportation, sightseeing tours and charter services on a seasonal and ad hoc agreement. Currently, Allegiant operates 299 routes to 94 cities.

Profitable Third Quarter 2015: Allegiant reported a very profitable quarter due to lower oil prices and network growth. The company demonstrated 8% growth in cities and 17% growth in routes, and it continued to grow off-peak. Flying on Tuesdays, Wednesdays and Saturdays has demonstrated a 66% growth, while a 50% growth is expected in Q4. The company’s revenues reached $299.96 million, up 13.2% YoY from $265.03 million in Q3 2014. Similarly, operating expenses were down 5.6% YoY, $222.87 million from $236.16 million, leading to a 167% YoY increase in operating income ($77.08 million from $28.87 million) and a 213.8% YoY growth in net income, $44.46 million from $14.17 million in the same quarter last year. Finally, gross margin reached 77% from 64% in Q3 2014.

Dividend History: Allegiant delivers an annualized dividend of $1.65 per share, yielding 0.97% at a payout ratio of 17%. The company returned nearly $38 million to its shareholders by repurchasing 175,307 shares in Q3, while its dividend growth from 2010 to 2015 is 120%.

Future Outlook: Allegiant will continue to support its operations through improving its systems and processes in order to achieve higher growth rates that do not exceed the capabilities of the company’s infrastructure. In addition, the company’s migration to an all Airbus fleet is expected to offer to Allegiant a competitive edge. Currently, the company operates 18 Airbus aircraft and will reach 25 by the end of 2015. The goal is to reach 50 Airbus aircraft over the next few years. Analyst consensus estimates an average earnings growth 29.6% for the next five years and an average EPS of $13.36, up 36.3% from current EPS of $9.80, through 2017.

Name Price ($) 52 wk low 52 wk high 52 wk low % 52 wk high % Market Cap ($ b) P/E D/E Beta Payout Ratio
Alaska Air Group 82.15 54.54 87.17 50.62% -5.76% 10.44 13.42 0.25 0.70 13%
Allegiant Travel 173.72 134.68 238.13 28.99% -27.05% 2.86 17.34 1.69 0.74 17%
SkyWest 19.48 21.90 10.71 -11.05% 81.89% 1.00 20.34 1.26 1.13 17%

SkyWest (Nasdaq: SKYW) is a Utah-based leading regional airline operating regular passenger and air freight services to the United States, Canada, Mexico, and the Caribbean. Through its subsidiaries, SkyWest operates its flights to 206 destinations across the Unites States and has partnerships with global leading carriers, including Alaska Airlines, American Airlines, Delta Air Lines and United Airlines. The company’s current fleet consists of 344 aircraft.

Q3 2015 Financial Highlights: SkyWest is widely recognized for its sustained operational and financial performance. Q3 2015 operating income reached $78.3 million, up 32.5% YoY from $59.08 million in the same quarter of 2014 as a result of effective operating leverage. Through the implementation of a fleet transition plan, SkyWest has altered its aircraft mix and added a new aircraft to its fleet, thus achieving strong operating efficiencies (operating expenses were down 7.7% YoY) and solid operating performance. The company has also improved its gross profit margin, 69% from 66%, in spite of the slight decrease of 4.9% YoY in revenues, $794 million from $834.6 in Q3 2014. Net income was down 12.3% YoY $36.27 million from $41.34 in Q3 2014. Its current annualized dividend is $0.16 per share, yielding 0.82% at a payout ratio of 17%.

FY 2016 Outlook: For 2016, SkyWest plans to continue improving its financial performance and profitability of its fleet through anticipated aircraft deliveries and fleet renewals. In terms of capital deployment, the company plans to deliver shareholder value through earnings growth and remains focused on effectively implementing its fleet strategy to sustain its strong operating performance and improve profitability. Analysts estimate an average EPS of $2.13 through 2017, up 121.5% from the current EPS of $0.96.