SkyWest (SKYW)

Is SkyWest (NASDAQ: SKYW) undervalued? Indeed, we believe the shares are undervalued at only 0.55 times current book value.

The company’s P/E of 8.4 and dividend yield of 1.1% is attractive. SkyWest alo has over $13 per share in cash ready to expand its operations. In our view, SkyWest is a classic Benjamin Graham stock.

We foresee major changes in the airline industry that will favor small carriers such as SkyWest. The company is one of the largest regional airlines, with service to 224 cities in the U.S., Canada, Mexico and the Caribbean.

Connecting flights are operated as Delta Connection and United Express under arrangements with Delta and United.

The company will soon end its affiliation with Midwest, which will have little effect on SkyWest’s earnings.

Delta and United control SkyWest’s scheduling, ticketing, and pricing and receive a percentage of revenues, and SkyWest is reimbursed for most fuel costs.

Demand for air travel remains subdued, although a slight pickup is now underway as evidenced by SkyWest’s 9.9% increase in January passenger revenue miles.

The company added new agreements with United Airlines and AirTran and will likely win additional new business during the next few quarters.

After enduring an extended downturn in business, major carriers will likely contract out many less-active routes to SkyWest and other small carriers.

EPS will probably increase 7% during the next 12 months with future increases dependent on new contract wins. The shares will likely climb to our Minimum Sell Price of 25.54 within two to three years.