Mesa Air Group: Failing to Take Off

Mesa Air Group (MESA) is a regional airline that partners with American Airlines, United Airlines, and other carriers to provide service to airports not directly served by the major carriers.

The stock is now down almost 68% from its 52-week high. Still, this troubled carrier may not be ready for a comeback just yet.

I am neutral on MESA stock.

Mesa Air Group

Mesa Air fills a definite need in the marketplace. Many regional airports are severely underserviced. Unfortunately, COVID-19 has been a disaster for the company and air travel as a whole.

Mesa currently operates a total fleet of 146 aircraft and 373 daily departures. It operates as American Eagle and United Express through agreements with the major airlines. American and United sell the tickets, while Mesa will provide the aircraft, maintenance, and crew. Mesa flies to 102 cities in 39 states and Mexico.

Headwinds Continue

Mesa Air significantly missed estimates in Fiscal Q4 of 2021. Earnings per share came in at a loss of $0.21, $0.33 less than estimates. Revenue was also off forecasts by more than 10%, coming in at $130.8 million vs. estimated revenue of $150 million. The stock cratered as a result, and investors should not expect a significant recovery anytime soon.

The total revenue for Fiscal Year 2021 was just $503.6 million. This is lower than the $545.1 million earned in Fiscal 2020, which is distressing as revenue is still nowhere near pre-pandemic levels. In Fiscal Year 2019, for instance, Mesa earned over $723 million in revenue. Wall Street expects a marked improvement over 2021 in 2022 to $625 million. However, this could all change quickly based on the state of the economy and COVID-19.

The gross margin is also down considerably. In 2019, Mesa posted a gross margin of nearly 36%. This fell to 24% in 2020 and 16% in 2021.

There could be several causes for this lack of pricing power. Many travelers to regional airports fly for business. Many businesses are choosing to use video calls over in-person travel due to COVID-19 and cost savings. COVID-19 is also still a lingering headwind on vacation travel. The Omicron variant has followed Delta, creating a difficult market for all airline companies.

Mesa has posted significant operating losses for the last three quarters. For Fiscal Year 2021, the company lost $51.8 million from operations. Interest expense added another $34.4 million to the losses as well. Mesa did generate $132.9 million in cash from operations, thanks to its significant depreciation expenses. Still, the company does not have deep pockets, and continued losses could mean more debt or equity financing to support operations.

Mesa’s stock currently trades at a forward non-GAAP price-to-earnings (P/E) ratio of over 40 based on estimates for Fiscal Year 2022. These estimates call for earnings per share of just $0.14. Obviously, even a small move higher or lower will drastically influence the P/E ratio due to the low estimate. The stock will likely not begin to appreciate significantly until revenues and earnings begin consistently beating estimates.

Wall Street’s Take

Turning to Wall Street, Mesa Air Group receives a Moderate Buy consensus rating, based on one Buy and two Holds assigned in the past three months. The average Mesa Air Group price target of $8.83 implies 57.4% upside potential.

In Search of a Catalyst

Mesa Air Group has a definite niche in its regional airline operations. However, the COVID-19 effects on air travel are not over and have been devastating to its results.

Revenues and margins have been down significantly since 2019 and are forecast to continue to underperform. In addition, the valuation is not enticing at this time, and the company needs several strong quarters to provide a catalyst for gains in this stock.

Disclosure: At the time of publication, Bradley Guichard did not have a position in securities mentioned in this article.