Mesa Air Group (MESA) is a regional airliner that operates a fleet of 146 airplanes with nearly 400 daily trips to 102 cities, primarily in the Southern and Western parts of the US and Mexico. Most of its business comes through operating agreements with American Airlines (AAL) and United Air (UAL).

Due to the pandemic, airline stocks had been one of the hardest-hit sectors over the past 18 months. Within the airline industry, I believe that investors should favor regional airlines as they should see their revenues bounce back first. This is because business travel and international travel will be the slowest segments to recover, while the fastest are vacations travel and people visiting family and friends.

Despite this massive catalyst, MESA remains quite cheap relative to its peers and the broader market. Further, MESA was able to get through the pandemic without taking on significant amounts of debt or issuing equity that would be dilutive in the coming years. Over the last few months, MESA’s stock price has declined along with other travel stocks as it became clear that case counts were once again on the rise and the Delta Variant was going to impede the economy’s reopening and return to normal. However, this is creating an exceptional opportunity for investors to scoop up MESA at a discount.

Growth

MESA has several, potent growth catalysts. The most impactful in the near term is increasing travel volumes as coronavirus case counts decline. New cases are down by more than 50% since the delta variant’s peak in early September. Additionally, many experts now believe that we may not see a meaningful increase in the winter months due to the combination of prior infections and vaccinations bringing the country close to herd immunity.

A longer-term growth catalyst for MESA is population growth in the Western and Southern parts of the country and the growing Latino population. Population in states touching the Mexican border accounted for nearly 40% of the US population growth over the last decade. Part of this is due to people migrating from Northern states due to a favorable climate, lower cost of living, and fewer state taxes. Another factor is the large Latino population which skews younger and has a higher than average fertility rate. 

The final catalyst for MESA is its pilot program with drone delivery company, Flirtey, to experiment with food delivery using drones. Given the growth of e-commerce and food delivery, last-mile delivery is one of the most difficult problems to solve. As the first company to get approval for food delivery via drone, MESA has a major opportunity on its hands.

This is another indication of MESA’s management which is innovative and forward-looking. Other moves in a similar vein include operating cargo flights for DHL, starting operations in Europe, and investing in two electric aircraft startups.

Value

Typically, when stocks have such attractive growth prospects, you tend to have higher multiples. The downside is that this means there is more risk embedded in the stock.

So, it’s certainly impressive that MESA is quite cheap with a forward P/E of 7. This is about ⅔ cheaper than the S&P 500 with its forward P/E of 21 and cheaper than many airlines which are still not profitable on an operational basis. 

MESA’s P/E returning to a more normalized level of 15 to 20 could be a powerful tailwind for the stock over the next few months especially as the drone delivery news likely put it on many investors’ radars.

POWR Ratings

According to the POWR Ratings, MESA has an Overall Rating of a B which translates to a Buy rating. B-rated stocks have posted an average annual performance of 19.7% which compares favorably to the S&P 500’s 7.1% return.

The POWR Ratings also evaluates stocks based on different components to give additional insight for investors. It’s not surprising that MESA’s Value grade is a B, considering its low P/E. Another measure is P/FCF which shows that MESA generated about $150 million in free cash flow over the last 12 months which is quite impressive considering its entire market cap is $270 million.

To see more of MESA’s POWR Ratings, including component Grades for Growth, Momentum, Stability, Sentiment, and Industry, click here. 

Putting It All Together

In recent months, MESA has been punished along with many other airline stocks. The first wave of selling was due to the delta variant which made clear that the economy and travel volumes returning to normal was not going to happen smoothly. The second factor has been the rise in oil prices which are at levels that will start to negatively affect margins.

However, this has created an exceptional opportunity for MESA. Regional air travel will be one of the first segments to bounce back. Additionally, MESA is less exposed to oil prices, because it has smaller planes and shorter routes. Finally, MESA has an embedded call option in terms of its drone delivery experiment that could be worth more than the entire company if it was spun out as an independent entity. 

Therefore, investors should use the current weakness to scoop up shares of MESA.

MESA shares were trading at $7.52 per share on Friday morning, down $0.05 (-0.66%). Year-to-date, MESA has gained 12.41%, versus a 23.36% rise in the benchmark S&P 500 index during the same period.

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles.

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