Should You Exit From This Small-Cap Airlines Play – MESA

Apr 08, 2022 12:00 AM PDT | Team Kalkine
Should You Exit From This Small-Cap Airlines Play – MESA


Mesa Air Group, Inc.

Mesa Air Group, Inc. (NASDAQ: MESA) is the parent company of Mesa Airlines, Inc., a regional airline based in Northern Kentucky that serves 120 destinations in 42 states, the District of Columbia, the Bahamas, and Mexico. All of its flights are operated as American Eagle, United Express, or DHL Express flights, according to the terms of capacity purchase agreements (CPAs) with its significant partners, American Airlines, Inc. and United Airlines, Inc., as well as a Flight Services Agreement (FSA) with DHL Network Operations (USA), Inc.

Why should Investors make an Exit?

  • Decline in topline and incurred losses: Due to a decrease in pass-through maintenance revenue linked with the company's E-175 fleet, total operational revenues declined 1.74% to USD 147.76 million in Q1FY22 (ended December 31, 2021) from USD 150.37 million in Q1FY21. In addition, MESA incurred net losses of USD 14.27 million in Q1FY22, compared to a profit of USD 14.12 million in Q1FY21.
  • Industry Lagging Gross Margins: The company reported an improvement in gross margins from 10.1% in Q4FY21 to 20.0% in Q1FY22. However, its gross margin in Q1FY22 is significantly lower than the industry median of 51.6%.
  • Leveraged Balance Sheet: The company's debt/equity ratio was 1.39x as of December 31, 2021, compared to the industry median of 1.01x. Furthermore, its long-term debt-to-total-capital ratio was 48.3% during the same time, compared to 36.9% for the industry norm. As a result, the company's balance-sheet risk has grown.
  • Bearish Technical Indicators: The MESA price is trading below the downward sloping trend line and facing the same resistance on the daily chart. Furthermore, the momentum oscillator RSI (14-period) is trading at ~33.68 level, trading in negative territory. On the weekly chart, the prices are trading below the trend-following indicator 50-period SMA, which may act as a resistance level for the stock. An important support level for the stock is placed at USD 3.40, while the key resistance level is placed at USD 4.60.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation


(Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company's FY1 trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:

MESA's stock price has been on a bearish trend throughout the year, fallen 70.53% in the past twelve months and is currently leaning towards the lower band of the 52-week range of USD 3.75 to USD 13.50. We have valued the stock using the EV/EBITDA-based relative valuation methodology and arrived at a target price of USD 3.50.

Considering the fall in fundamentals, industry lagging margins, highly leveraged balance sheet, current valuation, and bearish technical indicators, we recommend a "Sell" rating on the stock at the current price of USD 3.86, down 1.28% as of April 08, 2022, at 6:52 AM PDT.

Three-Year Technical Price Chart (as of April 08, 2022, at 06:52 AM PDT). Source: REFINITIV, Analysis by Kalkine Group

* The reference data in this report has been partly sourced from REFINITIV.

* All forecasted figures and industry information have been taken from REFINITIV