Regional air carrier
Mesa Air (MESA 14.83, +1.04, +7.54%) encountered significant turbulence when the company went public
back on August 6. Specifically, its 9.6 mln share IPO was downsized from the
original 10.7 mln expectation and priced at $12, below the $14-$16 projected
range. The weak demand came as a bit of a surprise because airline stocks had
been hot heading into its IPO pricing, including a whopping 70% surge for
SkyWest (SKYW), one of MESA's closest competitors.
However, the tables have turned dramatically in MESA's favor after that bumpy start. Since hitting lows on August 7, the stock has lifted higher by the tune of 21%.
Today, the catalyst that is helping to push the stock higher is the expiration of the 25-day quiet period, allowing firms involved with the IPO to publish research and estimates for the first time. As we discuss below, the consensus clearly landed on the bullish side.
MESA is a regional air carrier providing scheduled passenger service to 110 cities in 38 states, the District of Columbia, Canada, Mexico, Cuba, and the Bahamas. All of its flights are operated as either American Eagle or United Express flights pursuant to the terms of capacity purchase agreements it entered into with American Airlines and United Airlines.
MESA actually has been
the fastest growing regional airline in the United States over its last five
fiscal years, based on fleet growth, with a cumulative increase in aircraft of
As of March 31, 2018, the airline operated a fleet of 145 aircraft with approximately 610 daily departures. In terms of the aircraft, it operates 64 CRJ-900 aircraft under its capacity purchase agreement with American and 20 CRJ-700 and 60 E-175 aircraft under its capacity purchase agreement with United.
Over the last five
calendar years, MESA's share of the total regional airline fleet of American
and United has increased from 7% to 11% and from 4% to 15%, respectively. MESA
believes it has expanded its share with the major airline partners because of
its competitive cost structure, access to pilots under its labor agreements and
track record of reliable performance.
Its long-term capacity purchase agreements provide it guaranteed monthly revenue for each aircraft under contract, a fixed fee for each block hour and flight flown, and reimbursement of certain direct operating expenses, in exchange for providing regional flying on behalf of its major airline partners. Further, its capacity purchase agreements shelter it from many of the elements that cause volatility in airline financial performance, including fuel prices, variations in ticket prices, and fluctuations in number of passengers. In providing regional flying under capacity purchase agreements, MESA uses the logos, service marks, flight crew uniforms, and aircraft paint schemes of its major airline partners.
Quiet Period Expiration
Although more initiations are likely to be published throughout the day, the four we see so far this morning all land on the bullish side. The two most bullish firms appear to be BofA Merrill Lynch (Buy) and Raymond James (Strong Buy), each of which put a $20 price target on the stock. That is 27% higher than the current price.
Additionally, Stifel assigned a Buy rating on MESA while Cowen went with an Outperform and $16 price target. In its note, Cowen commented that the company is well positioned to win additional business due to their focus on larger in-demand regional jets, low cost structure and current pilot position.
To conclude, MESA's rough debut is now in the rear-view mirror and the stock has been on a nice roll. While it’s not a high-growth name, it does have a few key fundamental positives in its corner, such as strong cash flow generation, a low-cost structure, the potential for an acceleration of topline growth, and a low valuation. Today's bullish analyst calls have helped to illuminate those positives, driving the stock to new post-IPO highs.