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On Tuesday, Goldman Sachs analyst Catherine O'Brien upgraded SkyWest (NASDAQ:SKYW) stock from Neutral to Buy, while slightly reducing the price target to $117.00 from $119.00. The upgrade reflects a positive outlook on the airline's revenue and earnings potential amid the current economic conditions. According to InvestingPro analysis, SkyWest appears undervalued at current levels, trading at an attractive P/E ratio of 14.2x while maintaining strong profitability with $323 million in net income over the last twelve months.
SkyWest, which operates flights for major airline partners such as American, Alaska, Delta, and United, has seen an increase in revenue generated through capacity purchase agreements. In 2024, these agreements accounted for 84% of SkyWest's revenue, a rise from 80% in 2019. This strategic shift has contributed to impressive revenue growth of 20.2% over the last twelve months, as reported by InvestingPro. The company's reliance on such agreements has grown due to a reduced number of pilots available for prorate flying following the pandemic.
The capacity purchase agreements provide SkyWest with a stable income stream as the airline is compensated at a fixed rate primarily based on completed flights, flight time, and the number of aircraft under contract. This arrangement shields SkyWest from the fare environment fluctuations that typically affect other airlines' revenues. The stability of this business model is reflected in the company's "GOOD" Financial Health score from InvestingPro, which offers 8 additional exclusive insights about SkyWest's financial position.
O'Brien's commentary highlighted the airline's unique position within the industry, noting that SkyWest's business model makes it significantly less impacted by the broader economic challenges facing other US airlines. The analyst's outlook suggests that SkyWest is well-positioned to maintain steady financial performance even as the industry navigates uncertain economic terrain.
The price target adjustment to $117.00, down from $119.00, accompanies the rating upgrade, reflecting a nuanced view of the airline's future financial prospects. Despite the slight decrease in the price target, the overall assessment remains bullish on SkyWest's ability to outperform within the airline sector.
In other recent news, SkyWest Inc. reported impressive financial results for the fourth quarter of 2024, surpassing analyst expectations. The company achieved an earnings per share (EPS) of $2.34, significantly beating the forecasted $1.80, and reported revenue of $944 million, exceeding the anticipated $907.54 million. This marks a 26% year-over-year increase in revenue. Additionally, SkyWest reduced its debt to $270 million, the lowest level in over a decade. In terms of analyst activity, the company has not seen any recent upgrades or downgrades from major firms. SkyWest has also extended a contract with American Airlines (NASDAQ:AAL), allowing it to operate a total of 74 CRJ700s under a new multiyear agreement. The company plans to invest approximately $600 million in capital expenditures for 2025 and anticipates a 12% increase in block hours. Analysts from firms like Raymond (NSE:RYMD) James have shown interest in SkyWest's growth potential, particularly in underserved communities and fleet utilization.
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