Is It Worth Taking A Flier On Mesa Air?
Summary
- Mesa Air has survived the pandemic and in many ways is emerging stronger than before by taking advantage of government assistance.
- The balance sheet is less leveraged than before the pandemic, and revenues should continue to bounce back as the country progresses towards full reopening.
- Several tailwinds are present including pent-up demand and increases in consumer spending in the short term and the general increase in air travel long term.
- Risks and uncertainties exist, and Mesa's history of underperforming the S&P 500 still makes this a speculative play.
Investment Thesis:
Mesa Air Group, Inc. (NASDAQ:MESA) ((“Mesa" or “the Company”, hereafter)) has survived the pandemic and the balance sheet looks healthy. The company should benefit from travel demand tailwinds coming out of the pandemic and an overall increase in air travel demand over the long term. Mesa managed to remain profitable, with government assistance, in 2020 despite the circumstances and the stock is down more than 35% from recent highs. The likely short, and potentially long-term, decline in business travel is concerning as is recent insider selling; however, I believe the stock may be worth a speculative play for some investors.
Mesa Air Group
Mesa Air Group, Inc operates as a holding company for Mesa Airlines, Inc. Mesa Airlines, Inc provides regional air carrier services with partners American Airlines Group (AAL), United Airlines Holdings (UAL), and DHL (OTCPK:DPSGY) operating as American Eagle, United Express or DHL Express. They service regional airports that the airline majors do not service directly. Mesa services 116 cities in the United States, Bahamas, and Mexico according to their latest 10-Q, with examples including Reno, NV, Colorado Springs, CO, Long Beach and Carlsbad, CA, and Jacksonville, FL. As Mesa sums up succinctly on their website “Our partners sell the tickets and load the cargo, we provide the aircraft, crew, and maintenance.” Mesa Air has six hubs throughout the South, Midwest, and Western United States and owns 159 aircraft as of December 31, 2020.
Note: Mesa has a September 30 fiscal year end, so Q1 of fiscal year 2021 runs October 1 – December 31, 2020.
Mesa route map, picture from Mesa-air.com
Surviving the Pandemic
Prior to the pandemic, Mesa was a model of quarterly revenue consistency, however significant growth was fleeting. In addition, the company consistently reported positive operating income and has been reducing net debt each quarter since December of 2019. Net debt is computed by subtracting the short and long-term obligations from the Company’s liquid assets. This debt reduction comes in spite of a 137% increase in the fleet over the past 5 years.
Chart created in Microsoft Excel, data from Seeking Alpha and 10-Qs.
Mesa’s Q1 fiscal 2021 results (Oct 1 – Dec 31, 2020) easily surpassed estimates, beating revenue estimates by 15%. During this period, the country was experiencing a severe Covid-19 spike during the winter months. Mesa’s revenues suffered as a result and were significantly lower, 18%, than for the same period in the prior year - the last quarter prior to the pandemic. However, operating income was down less than 1% year-over-year with help of a government grant obtained through the CARES Act. Total, the Company received $95.2 million in support for April 2020 through October 2020 recognizing revenue of $83.8M in fiscal year 2020 and the remaining 11.3M in Q1 of fiscal 2021. Even without the $11.3M grant recognition the company would have reported positive operating income, no small accomplishment.
In addition, the Company secured a $195M 5-year low-interest loan from the United States Treasury which bears a rate of 3.5% plus the three-month LIBOR and used the proceeds, in part, to pay off higher interest debt. As part of this agreement, the Company has issued stock warrants to the United States Treasury. The effects of this dilution are minimal as basic earnings per share were $0.40 and diluted earnings per share, including the warrants, were $0.39 for Q1 2021. This financing has allowed the Company to reduce interest expense, and net debt, to the lowest level in several years.
Created by author with data from Seeking Alpha and 10-Qs
Balance Sheet is Less Leveraged
The assistance from the government has allowed Mesa to survive the pandemic and it will emerge with the balance sheet in relatively better shape than prior to the pandemic. The debt-to-assets ratio is slightly improved at 69% vs. 72% and the current ratio is considerably superior at 82% vs. 38% comparing Dec 2020 to Dec 2019 figures. Debt to equity is also down from 2.52 to 2.21. All of these measures show that the Company has de-leveraged as the travel industry is poised to return at, hopefully, full throttle sometime this year.
Looking Forward
Prior to the pandemic, air travel in the United States reached a peak of 927 million passengers in 2019, up from 647 million in 2003, a 43% total increase and compound annual growth rate (CAGR) of almost 2%. Since the recession slowdown in 2009, this has accelerated and the CAGR has been 2.31% over that time. Over the long-term it is highly likely that airline travel will continue to increase. Note that 1% of Mesa's revenue and flights were related to DHL for Q1 2021, hence the focus here on passenger travel.
Chart from the Bureau of Transportation Statistics
In the near-term, pent-up travel demand may significantly benefit Mesa. According to one recent study, 65% of responders were planning to travel more than they did prior to Covid and 33% were prepared to spend more money to do so. Many people who have put off seeing family and friends seem itching to do so in the coming months. Consumer spending has increased 10.7% in the first three months or 2021, in part due to the $1,400 economic impact payments. Families with children will also begin to see a monthly child tax credit check in July of 2021. Parents will receive either $3,000 or $3,600 annually, depending on the age of the child, paid out on a monthly basis. Increases in consumer income should continue to boost consumer spending, benefiting the travel industry directly and indirectly.
Risk and Uncertainties
While travel for entertainment purposes may increase in the near term, it is likely that business travel will continue to lag due to the convenience and cost savings of video conferencing. While I could not find information on this in direct relation to Mesa, it is safe to assume that many of the travelers to regional airports are traveling for business. In addition, Mesa and their partner airline majors were trounced by the S&P 500 since Mesa was listed in August 2018 after being taken private 7 years prior. The Company has not paid a dividend during this time and none is to be expected anytime soon. In fact, per their 10-K, there are debt covenants in place that would restrict dividends in some capacity. Insiders have made 43 sales in the last 12 months and no open market buys. Many of these seem to come from the exercising of options and many were sold for prices above the current price.
Chart from Seeking Alpha
The Stock Price
Prior to the December 2020 earnings release, the stock was trading at only $7.44 per share per the closing price on 02/09/2021, however investors were clearly impressed with earnings and the stock broke out on strong volume for the next several days, briefly hitting a high of $17.40 on March 11, 2021. For those keeping score this is an increase of 133% over the course of just over one month.
Chart from Seeking Alpha
It appears that investors were then quick to capitalize on those gains as the stock has pulled back sharply from those highs. A series of negative share price events are noted. First, Deutsche Bank downgraded the stock in early March 2021 calling shares “fairly valued” and then it was disclosed that Chief Executive Jonathan Ornstein sold 109,828 shares for a total of $1,575,774 or $14.35 per share on average. Another negative event was noted by Mesa in a press release. Due to the severe winter storms which caused power outages and further disruption to travel in and around Texas during February 2021 many flights were cancelled. As a result, Mesa missed guidance on block hour estimates for this period and continued to incur costs for cancelled flights. And finally, United Airlines (UAL) dragged down the sector with an earnings miss and weak guidance on April 20, 2021. Lost in the negative news was an upgraded price target from Raymond James to $14.00, up significantly from their previous target of $10.00 and representing a 24% gain from the closing price on 04/30/2021.
Conclusion
Mesa has been impressive in surviving the pandemic and taking advantage of the assistance afforded it to come out looking strong on the other side. The large share price increase after Q1 2021 earnings shows that investors are willing to reward the Company for results. If Mesa can again top estimates on May 10th, shareholders may be rewarded. Recent events have contributed to a significant sell-off from the highs that may be overdone and losing steam. Tailwinds exist for the company and for the industry as a whole, however I still consider this a speculative play headed into earnings due to significant risks and uncertainties.
This article was written by
Analyst’s Disclosure: I am/we are long MESA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (19)
I sold my major airline positions and bought Mesa looking at much more quick returns. Looking at the high of $17 as a medium term value.
Majors will keep loosing money until 2023. They have to bear the rising costs of fuel and labor is less productive with less flights.
