Update: Skywest Earnings

| About: SkyWest, Inc. (SKYW)

Summary

The company beat Q2 consensus on the top line, but missed on the bottom line.

We are still bearish on the company, but note that it has fallen below our price target.

We felt the company was due to miss expectations, given the weakness in its ExpressJet acquisition.

Skywest (NASDAQ:SKYW) managed to post Q2 earnings of a $0.29 loss (missing consensus for a $0.21 loss), but revenues came in at $817 million (besting $801 million consensus). Driving the earnings miss were larger-than-expected costs related to pilot training, and the writedown of asset values from its ExpressJet acquisition. Shares are up 6% over the last week.

But shares are down 33% since we first covered the stock in October last year. It's surpassed our $11.30 fair value estimate. It's now trading at 15.6x earnings and a PEG ratio of 2.6, both well above where the stock traded on our initial coverage. As we noted in October:

Industry consolidation should put serious pressure on the regional airline industry, including SkyWest. And so, that will reduce demand, while continued issues with its ExpressJet will continue to strain margins. SkyWest is also one of the most expensive names in the industry and lofty expectations create an opportunity for an earnings miss, which should drive the stock closer to its $11.30 fair value.

We still don't like the valuation, but with the recent note, the company will see a large number of its unprofitable 50-seat aircraft contracts expire over the near term; 56 are expected to expire in the second half of 2014, and 101 will expire by the end of 2015.

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