Stifel Takes Bullish Stance On Mesa Air Group, Says Regional Carriers Enjoying Higher Demand

Regional airline Mesa Air Group Inc MESA is well-positioned to take advantage of favorable industrywide trends and company-specific initiatives to drive utilization, according to Stifel.

The Analyst

Stifel's Joseph DeNardi initiated coverage of Mesa Air Group with a Buy rating and $15 price target.

The Thesis

Major global airliners must decide how to effectively compete against lower-cost airliners without diluting their own profit profiles, DeNardi said in the initiation note. (See his track record here.) 

The likely long-term solution is for the major airlines to focus on fortress hubs and rely on regional airlines to feed into the hubs, as smaller markets are less susceptible to competitive pressures from ultra low-cost carriers, the analyst said. 

This would justify growing demand for the exact service Mesa provides, he said. 

At the company level, Mesa's management reached a new pilot contract that appears to have meaningfully contributed to improvements in pilot hiring and retention rates over the past few months, DeNardi said. This should help Mesa increase utilization rates back to normal levels and generate an asset-efficient revenue growth profile along with higher margins, better cash flow and an improving balance sheet through at least 2020, he said. 

Mesa's stock is trading at a roughly 10-percent discount on an EV/EBITDAR basis to its closest peer SkyWest, Inc. SKYW, but the valuation gap should improve in Mesa's favor if it shows a continued improvement in utilization rates over the coming 18 months, according to Stifel. 

Price Action

Mesa Air Group shares were rallying 14.5 percent to $15.79 at the time of publication Tuesday.  

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