SkyWest, Inc. (NASDAQ:SKYW) and Allegiant Travel Company (NASDAQ:ALGT) are the two most active stocks in the Regional Airlines industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect SKYW to grow earnings at a 13.97% annual rate over the next 5 years. Comparatively, ALGT is expected to grow at a -3.50% annual rate. All else equal, SKYW’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. SkyWest, Inc. (SKYW) has an EBITDA margin of 4.86%, compared to an EBITDA margin of 29.49% for Allegiant Travel Company (ALGT). This suggests that ALGT underlying business is more profitable. SKYW’s ROI is -2.20% while ALGT has a ROI of 19.10%. The interpretation is that ALGT’s business generates a higher return on investment than SKYW’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. SKYW’s free cash flow (“FCF”) per share for the trailing twelve months was -2.11. Comparatively, ALGT’s free cash flow per share was -1.54. On a percent-of-sales basis, SKYW’s free cash flow was -3.5% while ALGT converted -1.82% of its revenues into cash flow. This means that, for a given level of sales, ALGT is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. SKYW has a current ratio of 1.20 compared to 0.90 for ALGT. This means that SKYW can more easily cover its most immediate liabilities over the next twelve months. SKYW’s debt-to-equity ratio is 1.94 versus a D/E of 1.91 for ALGT. SKYW is therefore the more solvent of the two companies, and has lower financial risk.
SKYW trades at a forward P/E of 9.95, a P/B of 1.32, and a P/S of 0.63, compared to a forward P/E of 11.13, a P/B of 4.38, and a P/S of 1.40 for ALGT. SKYW is the cheaper of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. SKYW is currently priced at a -14.71% to its one-year price target of $42.50. Comparatively, ALGT is -20.93% relative to its price target of $157.27. This suggests that ALGT is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.00 for SKYW and 2.60 for ALGT, which implies that analysts are more bullish on the outlook for ALGT.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. SKYW has a beta of 1.65 and ALGT’s beta is 0.00. ALGT’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. SKYW has a short ratio of 3.25 compared to a short interest of 7.50 for ALGT. This implies that the market is currently less bearish on the outlook for SKYW.
Allegiant Travel Company (NASDAQ:ALGT) beats SkyWest, Inc. (NASDAQ:SKYW) on a total of 7 of the 14 factors compared between the two stocks. ALGT is growing fastly, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, SKYW is the cheaper of the two stocks on an earnings, book value and sales basis, ALGT is more undervalued relative to its price target. Finally, LTXB has better sentiment signals based on short interest.